On May 14, 2018, Rosneft released its first quarter results for 2018. The company’s average daily hydrocarbon production stood at 5.71 million barrels of oil equivalent (mmboe), which is a figure close to the level observed in the first quarter of 2017. Liquids production increased 0.3 percent quarter-on-quarter. Gas production in the reporting period amounted to 16.9 billion cubic meters (bcm). The company also managed to achieve refining quality improvement with the light products yield reaching 58.8 percent and the refining depth increasing to 75.4 percent.

Upstream

Hydrocarbon production at Rosneft reached 5.71 mmboed in the first quarter of 2018, remaining close to the level observed in the fourth quarter of 2017.

The average daily liquids production in the first quarter of 2018 grew 0.3 percent quarter-on-quarter to 4.57 million barrels (bbl), but declined 1.2 percent year-on-year, constrained by the company’s production cut obligations under Russia’s agreement with OPEC countries. Taking into account these external limitations, Rosneft seeks flexible solutions in the production management approach based on the projects’ economic efficiency. This methodology gives Rosneft’s management the ability to reactivate the company’s spare capacity, which exceeded 100 thousand barrels per day (kbpd) at the end of the first quarter of 2018.

In the first quarter of 2018, developmental drilling was at 2.8 million meters, with the in-house drilling share standing at 60 percent. The number of new wells commissioned increased by 22 percent with the share of horizontal wells going up to 39 percent. The number of new horizontal wells with multistage fracs jumped by more than 65 percent year-on-year.

Rosneft’s largest asset RN-Yuganskneftegaz demonstrated stable production growth. On the back of the company’s introduction of advanced drilling technology and its successful development of the Tyumen suite last year, oil output sustainably exceeded 190 ktpd, a number reflecting growth of 10.8 percent year-on-year.

Samotlor also started improving the production trend with investment incentives in place and a revision to the development program. During the first quarter of 2018, oil output at the field rose by 0.3 percent, which is a positive development, in view of three-to-five percent decline figures seen in prior years.

Rosneft keeps developing the company’s major projects successfully. The production level at the company’s greenfields, including the Kondinskoye, the Yurubcheno-Tokhomskoye, and the Srednebotuobinskoye fields, exceeded 100 kbpd.

Developmental drilling, as well as the setting up of new well pads and infrastructure facilities, is ongoing. Construction work on a gas-turbine power plant at the Kondinsky field of the Erginsky cluster is near completion. A horizontal well with a start-up oil flow rate of 240 tons per day (tpd) was commissioned at the field. The average flow rate in the region was at around 30 tpd in 2017. A seven-stage frac with a proppant volume of 500 tons was performed at the field, and the drilling rate was at 4.8 thousand meters per rig-month. Advanced technologies of hard-to-recover reserve extraction were utilized at the Erginsky project, including real-time controlled horizontal drilling, multistage fracturing with ultra-strong polymer proppant, and other oil recovery enhancing technologies. Rosneft continues exploration and appraisal activity at all license areas to ascertain the geological structure of productive formations and prepare reserves for full-scale developmental drilling.

Construction and installation of first-priority facilities are at the final stage now at the East Siberian Yurubcheno-Tokhomskoye field, and preparations started for test mode commissioning of second-stage facilities. Development drilling is also underway at the site, where the construction of the second multilateral well was completed in January. Well testing resulted in high oil flow rates of 289 tpd, which is more than two times the volume registered at the neighboring wells. A new pressure-managed drilling technology that entailed injecting nitrogen into drill strings was used to drill the multilateral well. Innovation technologies have been extensively used in the field to increase the coverage of productive formations and to increase the oil recovery factor.

Infrastructure facilities construction and developmental drilling are ongoing at the Srednebotuobinskoye field as part of second stage start-up preparations. The program of pilot oil production started at the Osinsky horizon with hard-to-recover reserves. As of the end of March 2018, daily oil output exceeded seven thousand tons.

The Tagul, the Russkoye, and the Kuyumba fields development, which envisions the construction of main infrastructure facilities to commence developmental drilling, is in line with the schedule.

During the first quarter of 2018, gas production amounted to 16.87 bcm, demonstrating a two-percent decrease year-on-year. Associated petroleum gas (APG) utilization level was at 85.7 percent in the first quarter of 2018.

In December 2017, gas production at Rosneft’s Egyptian offshore Zohr field started. Five development wells have been commissioned at the field with total gas output at 21 million metric cubic meters per day (mmcmpd) for the whole project. Rosneft’s share in the project is equal to some four mmcmpd. The first quarter of 2018 saw gas production reach approximately 0.9 bcm for the whole project, with about 160 million cubic meters (mmcm) attributable to Rosneft. In late April 2018, the new gas processing facility, referred to as Train 1, was commissioned at the site. In the beginning of May, the next gas processing facility, referred to as Train 2, was launched. The start of additional facilities allows increasing the current capacity up to 34 mmcmpd for the whole project, and to 7.0 mmcmpd for Rosneft’s share in the nearest future. In accordance with project operator plans, the commissioning of four gas processing trains, as well as the completion of development wells and marine infrastructure facilities, including pipelines and control systems, will be done by the end of 2018.

A total of 3.6 thousand kilometers of onshore 2D seismic surveys and 4.7 thousand square kilometers of 3D seismic surveys were conducted in the first quarter of 2018. These figures are up by three percent and 18 percent year-on-year respectively. 14 exploration wells were completed with an 86-percent success rate. Exploration activity conducted in the first quarter of 2018 resulted in the discovery of 26 new deposits.

Refining, commerce, and logistics

In the first quarter of 2018, the oil refining throughput at Rosneft’s refineries in Russia amounted to 24.7 million metric tons (mmt), declining by 2.6 percent quarter-on-quarter. The decline is attributable to the optimization of the refineries’ utilization rate in the current macro environment. The objective of the upgrades was to ensure an efficient refining level in terms of secondary processes with the goal of fully meeting Russia’s domestic demand for high-quality motor fuels. The changes were also designed to accommodate the company’s refinery repair schedule.

Rosneft boosted its light product yield to 58.8 percent (plus 0.1 of a percentage point year-on-year) and the refining depth to 75.4 percent (plus 1.4 percentage points year-on-year) on the back of the company’s modernization program.

In March 2018, Rosneft produced the first batch of high-octane motor gasoline AI-100 at the Ryazan refinery. The fuel ensures optimal performance for high-power engines. The product has also better environmental characteristics. The first batch of high-octane fuel has been supplied for the LADA Sport Rosneft racing team. The high-octane motor gasoline AI-100 produced by Rosneft has become the official fuel for the Russia-based race of the touring car championship.

The first batch of the new type of Arctic diesel fuel (ADF) with a lower filterability temperature limit (minus 50 degrees Celsius) was shipped out from Rosneft’s Komsomolsk refinery in February 2018. The production of Class 3 winter diesel fuel (WDF) is underway. These types of products are intended for the Far North and Far East regions of the country.

The Ryazan refinery conducted an upgrade for on-spot product loading units. The refinery deployed an automation process to load light products into rail tankers, significantly improving industrial and environmental safety.

As part of Rosneft’s import substitution program, the foreign-made catalysts purchased for the hydrogen unit of the Kuibyshev refinery were substituted with catalysts produced by the Angarsk Plant of Catalysts and Organic Synthesis.

As part of international crude trading development and maintaining supplies through high-marginal channels, Rosneft entered into a contract with Total Oil Trading SA to supply crude oil via the Druzhba pipeline to Germany in the volume of anywhere from 4.8 to 10.8 mmt for two years.

Rosneft continued increasing crude supplies to eastern destinations as well: the first quarter of 2018 saw east-bound shipments increase by 19.5 percent to 13.5 mmt year-on-year.

In the first quarter of 2018, products sales through the high-margin retail channel increased by 3.7 percent year-on-year partly due to the emerging growth in industrial production and truckage turnover in the beginning of 2018. An additional incentive for fuel sales growth was Rosneft’s enhancement of diesel fuel quality that gave the company a competitive advantage during the winter-and-spring season. The revenue from associated products sales rose by two percent year-on-year as a result of Rosneft’s broadening its product mix offerings at the company’s retail sites.

After the roll-out of Rosneft’s new loyalty program was completed in 57 regions of Russia, the company continued its efforts to increase the number of participants in its two loyalty programs Family Team and BP Club through targeted promotions. As of March 31, 2018, 6.8 million members have joined the programs.

Rosneft constantly monitors the fuel quality sold at its retail sites using in-house mobile laboratories. As of this year’s start, fuel quality control is conducted in all of Russia’s regions where Rosneft has its presence.

As part of the company’s multi-fuel supply development, three retail sites were brought into testing operations in Ulyanovsk and Voronezh to sell compressed natural gas as a motor fuel. The reconstruction of another eight filling stations is expected to be completed in the near future.

International operations

Rosneft Deutschland GmbH, a subsidiary of Rosneft, and Germany’s BITUMINA Handel GmbH & Co. KG, a subsidiary of Basalt-Actien-Gesellschaft, signed an agreement for bitumen processing and the production of polymer-modified bitumen products based on Rosneft’s formulation. The new product range, which will be marketed under the Alphabet brand, will allow Rosneft Deutschland to increase the supply of in-house-made high-quality bitumen to customers within Germany and in other countries.

Financial performance

Rosneft’s revenues and its equity share in the profits of associated companies and joint ventures have gone up. The company’s revenue in the first quarter of 2018 was up to RUB1,722 billion (USD30.9 billion), or by 0.8 percent quarter-on-quarter, and by 22.1 percent relative to the first quarter of 2017, on the back of higher crude oil prices and the optimization in sales channels despite the remaining constraints in production within the OPEC+ agreement.

Rosneft’s EBITDA in the first quarter of 2018 amounted to RUB385 billion (USD6.8 billion), remaining almost unchanged quarter-on-quarter and rising by 15.6 percent in relation to the first quarter of 2017. In a favorable market environment, the financial results for the first quarter of 2018 were negatively impacted by an export duty lag.

Lifting costs were at 185 rubles per barrel of oil equivalent (boe) (or USD3.3/boe) in the first quarter of 2018 compared to 199 rubles/boe (or USD3.4/boe) in the fourth quarter of 2017. The improvement in operating costs was driven by lower energy expenses, declining wages, decreasing materiel consumption, and seasonal cuts in workovers, as well as in the maintenance of pipelines and oil equipment.

The net income to be allocated to Rosneft’s shareholders reached RUB81 billion in the first quarter of 2018, a figure that is more than seven times higher year-on-year thanks to the operating income growth and decreased foreign exchange effects. The decline in net income is comparable to the figure registered during the previous quarter and may be ascribed to the recognition of certain one-off income items in the fourth quarter of 2017.

Capital expenditures

Capital expenditures were at RUB223 billion (USD3.9 billion) in the first quarter of 2018. Capex growth from the level seen in the first quarter of 2017 is driven by heightened activity in upstream projects, including capital investments at the Kondaneft and the Zohr projects.

During the first quarter of 2018, Rosneft’s free cash flow improved considerably to RUB142 billion (USD2.5 billion), or three times higher against the fourth quarter of 2017. The growth in free cash flow is mainly driven by lower capital expenditures and the size of working capital.

In terms of Rosneft’s financial sustainability, the company repaid RUB1,027 billion worth of financial liabilities in the first quarter of 2018, inclusive of interest. Short-term financial liabilities decreased by 49 percent through long-term loan refinancing.

On April 25, 2018, Rosneft’s board of directors recommended the payment of the final dividend of 6.65 rubles per share for 2017. After being approved at the annual shareholders’ meeting, the 2017 dividend, coupled with the semi-year dividends for the first half of 2017, amounts to 10.48 rubles per share, which corresponds with a 50-percent net income payout under IFRS (International Financial Reporting Standards).