Vitol Poised to Join Rosneft's Vostok Oil Project

Rosneft said trading firms Vitol and Mercantile & Maritime Energy (MME) have signed a preliminary agreement to buy a joint 5% stake in its huge Vostok Oil project in the Russian Arctic. Vitol's rival Trafigura had previously purchased a 10% stake in Vostok Oil -- one of the world's largest onshore oil developments -- for €7.3 billion ($9 billion) (IOD Jan.22'21). The two deals show that traders are still expanding their upstream presence at a time when the majors are cutting spending on oil development. If things work out well for them, they could profit from higher prices as reduced upstream investment results in tighter oil supplies in the years ahead. Rosneft alluded to such a scenario in its announcement about the deal with Vitol and MME. Details Scarce Rosneft did not reveal details of the agreement with Vitol and MME, saying only that "it is expected to be closed after the parties receive the required regulatory and corporate approvals." However, the price that Trafigura paid for a stake twice as big as the Vitol-MME share is likely to provide some guidance. Among other things, it's not known how the shares acquired by Vitol and MME will be divided between them, and to what extent they may seek external funds to finance the deal. Trafigura is understood to have used €1.5 billion of its own funds and the proceeds of a €5.8 billion syndicated loan organized by the the Credit Bank of Moscow in its earlier Vostok Oil deal with Rosneft (IOD Jan.22'21). Long-Term Relationship Rosneft CEO Igor Sechin said the latest Vostok deal reflects the Russian oil giant's "successful long-term cooperation with Vitol and Mercantile & Maritime." Singapore-based MME is an independent commodities trading business led by CEO Murtaza Lakhani. Market sources said MME has been a regular customer of Rosneft and that its purchases have included vacuum gasoil. It has also worked with Rosneft in Venezuela and northern Iraq, they added. MME and Vitol have worked together to market oil on behalf of the Kurdistan Regional Government, trading sources say. Vitol has long lifted crude and refined products produced by Rosneft. In 2013 Vitol and Glencore teamed up to provide $8.3 billion to Rosneft in a prepaid oil supply deal to help the Russian company finance the purchase of TNK-BP. Risk and Reward Speaking at the St. Petersburg International Economic Forum last week, Sechin warned that a hasty transition away from fossil fuels could lead to an oil supply crunch in the years ahead. Rosneft has talked up the Vostok Oil project, which is set to produce 600,000 barrels per day by 2024 and 2 million b/d by 2030 -- a timeframe in which oil demand is expected to remain relatively robust. Sources told Energy Intelligence that the traders investing in the project will lift future volumes from Vostok proportionate to their shareholdings."There will be no favoritism," an insider said. Vitol's involvement in the Vostok deal follows its recent acquisition of shale oil acreage in the Permian Basin of West Texas with current production of 40,000 barrels of oil equivalent per day for an undisclosed sum (IOD Apr.30'21). Rosneft had previously indicated that it expected to bring a new partner into the Vostok project by the end of this year (IOD May14'21). However, some sources had indicated that Vitol might be reluctant to take a stake in case US sanctions against Russia were extended to cover Vostok Oil. The project is not currently subject to US sanctions. 'Low-Carbon Barrels' Trafigura CEO Jeremy Weir, speaking in St. Petersburg last week, said that Vostok will produce "low-cost, low-carbon intensity and high-quality oil that will be required for many years." Rosneft has said Vostok Oil's carbon footprint is 75% lower than that of other major new oil projects around the world. Its resource base is estimated at more than 40 billion bbl of low-sulfur crude oil that does not require extensive processing at refineries. Rosneft has also noted that Vostok's location in northern Russia means it has the flexibility to supply oil in two directions -- to Europe and Asia -- via the country's Northern Sea Route (IOD May14'21). Nelli Sharushkina, Moscow, and Paul Sampson, London