Moscow (Platts)--21Mar2013/1000 am EDT/1400 GMT

Russia's Rosneft has realized its ambition of becoming the world's biggest publicly traded oil and gas producer, with the closure March 21 of its $56 billion deal to buy TNK-BP.

The enlarged company, in which UK major BP now owns nearly 20%, controls some 40% of Russia's total crude output of more than 10 million b/d, and has also become a major Russian refiner, with control of 11 plants totaling some 1.6 million b/d, nearly a third of Russia's total refining capacity.

It is a far cry from the old Rosneft, which before taking over the main assets of former oil giant Yukos in 2005, produced only around 275,000 b/d of oil at the start of the last decade. The new Rosneft produces above 4.7 million b/d of oil equivalent compared with ExxonMobil's average of 4.24 million boe/d in 2012.

The official deadline set for the completion of the deals - under which Rosneft is to buy 50% stakes in TNK-BP from BP and a Russian group of shareholders - was the beginning of the second quarter, meaning the deals have been closed well ahead of schedule.

"We welcome BP as a strategic investor in Rosneft and look forward to their involvement in forming the future strategic direction of the company through its representation on the Rosneft board of directors," Rosneft chief Igor Sechin said in a statement.

"We are closing the deal of acquiring BP's share in TNK-BP earlier than we previously planned and we want to thank our partners from BP for their cooperation throughout the process," he said.

BP CEP Bob Dudley also praised the deal closure. "This is a historic day for BP in Russia. BP has invested in Russia for more than 20 years and for a decade we have been Russia's largest foreign investor through our involvement with TNK-BP. We aim to continue that success with today's transaction, which increases our stake in Rosneft."

"We hope to help Rosneft to deliver synergies through its acquisition of TNK-BP and to grow production and reserves through brownfield, greenfield and unconventional opportunities as Rosneft strengthens its position among the world?s leading global energy companies," Dudley said.

The synergy effect from the mega deal is estimated at least $10 billion, with the enlarged company's financial performance expected to increase by 60-70%.

The joint development of Rosneft and TNK-BP assets located in the same regions would be a major source of synergy, allowing for the optimization of expenses and a focus on the best assets in the merged portfolio.

One such area is the Vankor region in the northern part of East Siberia, which is becoming the center of a new oil province.

Integrated development of greenfield projects in the Vankor region, where combined 3P reserves of the two companies are estimated at 6.6 billion boe, can generate about $4-$5 billion of additional value, Sechin said in February.

Other significant benefits can be achieved through the joint development of the Yurubcheno-Tokhomskoye, Kuymbinkoye and Verkhnechonskoye fields, to the south of East Siberia, near to Russia's eastbound crude export pipeline East Siberia-Pacific Ocean (ESPO). Apart from those Greenfield projects, Rosneft and TNK-BP both have projects in West Siberia - the key producing region for both companies.

MAJOR PLAYER

The acquisition of TNK-BP - coupled with Rosneft's strategic partnership with international oil majors to develop offshore and unconventional reserves in Russia and elsewhere in the world - has paved the way for the remarkable transformation of the Russian state-run company into a major player on the global market, analysts say.

"These factors combine to make Rosneft a leading emerging market oil and gas player, and confirm it as a gem oil supermajor," analysts at UBS said in a recent note.

Rosneft recently teamed up with ExxonMobil, Italy's Eni and Norway's Statoil to develop offshore and tight oil reserves, and is discussing similar cooperation with Chinese and Japanese companies as the company looks to expand into new areas, including LNG production. Rosneft owns a total of 41 licenses in Russia's hydrocarbon-rich continental shelf.

Initial recoverable resources at those licenses are estimated at 275 billion boe, with total investments within the partnership with ExxonMobil, Eni and Statoil at an exploration stage set to exceed $14 billion.

While Rosneft will remain effectively a government-controlled company - it will retain 69.5% in Rosneft - BP is set to have a major role to play in the company's development.

Following the Rosneft/TNK-BP deal, BP will become Rosneft's second largest shareholder with a near 20% stake.

The new tie-up with Rosneft allows BP to revisit its plans on operations in Russia after an initial strategic partnership deal between Rosneft and BP to explore several blocks in the Arctic waters failed in 2011.

Dudley has said he is excited about his company's role in the development of Russia's vast oil and natural gas reserves. BP is happy with its role as a shareholder, he said in early March.

"There is enormous scope for increasing Russia's production - through enhanced recovery in brownfield developments in Western Siberian and the Volga Urals fields and also through exploration and production in greenfield developments in Eastern Siberia and the Yamal Peninsula," said Dudley.

"Russia also has the potential to develop its own shale and tight oil," he said. Dudley also said BP supports Rosneft's efforts on cooperation with other companies. The two companies are also negotiating new joint ventures for when the TNK-BP acquisition is completed.

Rosneft expects the full integration of TNK-BP to take a year after all the necessary legal documents have been signed, although actual integration work has already started.

INTEGRATION CONCERNS

But the enormous scale of the merger raises concerns over whether the company would be able to incorporate TNK-BP's operations as smoothly as it would like while also maintaining stable work during the transition period.

"Of course, there is execution risk, with TNK-BP widely regarded as high performing within the Russian oil and gas sector, hence there is a risk that some people/skills/know-how are lost," UBS said in a separate note.

"In any event, companies of the scale of the new Rosneft present considerable management challenges, which Rosneft must address," it said.

Rosneft's significantly increasing debt burden also raises concerns as the company has said it plans to get up to $30 billion in loans from banks to help finance the acquisition.

Rosneft intends to fund the deal through a combination of its own cash, as well as TNK-BP's money, loans from Russian and international banks as well as proceeds from issues of debt securities in and outside Russia.

Apart from bank loans, Rosneft has also inked several pre-paid long-term crude supply deals, with the proceeds widely expected to be used for financing the acquisition.

These include a $10 billion pre-payment deal with Glencore and Vitol, under which Rosneft is to supply a total of 67 million mt of crude to the two companies over five years starting this year.

Another similar deal is a $15 billion contract with Polish refiner PKN Orlen for supplies of 18 million mt of crude over three years, effective from February.

Analysts noted that high borrowings put greater pressure on Rosneft's leverage and liquidity, which could weaken the company's financial position, despite the expected operational synergies.

"Part of the financing is likely to be of a semi-permanent nature and assumes refinancing in the short term. This would create higher-than-average oil and gas sector liquidity risks for Rosneft, particularly during periods of volatility in the capital markets and given the increased vulnerability of the global banking system," Moody's rating agency said in late November.

But others believe Rosneft's unparalleled government support means it will be able to rely on the Kremlin to support its financial risk profile.

And regardless of how the risk of a $56 billion takeover is perceived, one thing is for sure: Rosneft's rapid climb to the very top of the world's oil producer league is unlikely to be repeated elsewhere anytime soon.

--Nadia Rodova, nadia_rodova@platts.com

--Stuart Elliott, stuart_elliott@platts.com

--Edited by James Leech, james_leech@platts.com

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