On 23 October 2012, the Financial Times reported that Russian energy giant Rosneft (MSX:ROSN, LON:ROSN) was on the way to becoming the largest listed oil company in the world, after it announced the $55 billion (£34.4 billion) deal for acquiring 100 percent of the TNK-BP venture.

The TNK-BP Deal

On October 22, Russia’s president Vladimir Putin gave his blessing for Rosneft’s latest deal to Igor Sechin, the company CEO, at a meeting in Mr Putin’s residence outside Moscow. In the two-part deal, Rosneft is to acquire the 50 percent stake of BP (NYSE:BP, LON:BP) for $12.3 billion in cash, and the rest in shares. Bloomberg reports that as a result of the deal, the UK oil group will take a 19.75 percent stake in Rosneft and obtain two seats at the board. In addition, Rosneft will also buy out BP’s Russian billionaire partners for a further $28 billion in cash.

After the deal, which will increase Rosneft’s output to 4.6 million barrels of oil equivalent per day, the Russian company will match the output of Exxon Mobil Corp (NYSE:XOM), the world’s largest publicly traded oil producer. In addition, Rosneft will control more than 40 percent of Russia’s crude output.

“This deal is in line with the Russian government’s strategy of reversing the privatisation of oil and gas resources that took place in the 1990s,” noted Andrey Golubov, a finance lecturer at Cass Business School in London, as quoted by Bloomberg. The deal puts Rosneft “on par with global giants like Exxon Mobil.”

Rosneft’s Aggressive Growth

The FT reports that Rosneft’s growth will mark the end of the oligarchs’ presence as major players in Russian oil, with the turnaround starting when Rosneft acquired the main assets of Yukos, the oil empire built by the tycoon Mikhail Khodorkovsky in controversial bankruptcy auctions between 2004 and 2007. The acquisitions helped Rosneft win a market capitalisation of $80 billion on its London IPO in 2006.

“Never before in the history of the oil industry has there been such aggressive growth,” noted Valery Nesterov, energy analyst at Sberbank (MCX:SBER), as quoted by the FT. “This was only possible because of the full support of the Russian state.”

Overexpansion Concerns

Investors, however, are already expressing concerns about Rosneft’s overexpansion, given that the state-backed company has undertaken several capital-intensive projects after signing partnership agreements with Exxon, the Norwegians Statoil (NYSE:STO) and the Italian Eni (BIT:ENI). The FT quotes a source close to Rosneft as saying that too many balls were up in the air. “Even one of these projects would be a challenge, but all at once is incredible.”

In addition to fears of overexpansion, investors are also concerned about potential interference from the Russian state. “Whenever there is a political component to decisions, they always go against the grain of boosting efficiency and market capitalisation,” pointed out Mr Nesterov, as quoted by the FT.

Western explorers also seem uneasy, with Bloomberg quoting Pavel Molchanov, analyst at Raymond James Associates Inc as saying that no other company will be able to replicate BP’s “seal of approval” from President Putin, adding that future contracts of similar scope were out of the question for outsiders.

“Ten years ago, Russia was a much more open place to do business,” said Mr Molchanov, as quoted by Bloomberg. “But that is no longer the case, thanks to Vladimir Putin. The international oil companies are having to look elsewhere for opportunities at a time when the set of opportunities is growing more limited and costly.”