Russia has consummated some huge energy deals with China in recent weeks. These deals are – or at least are being advertised as – major steps forward in the Russo-Chinese energy relations, Russia’s pivot to Asia – which uses big energy sales to upgrade its influence and standing – and the development of the energy base in Eastern Siberia, the Arctic and the Far East. All seen in Moscow as necessary preconditions for Russia’s return to the stage as a great, independent Asian power, and as a major energy player for years to come.
In the biggest deal, worth an estimated $270 billion, Rosneft agreed to supply CNPC (China National Petroleum Corporation) with 365 million tons of oil over 25 years. In return, CNPC has apparently made a pre-payment to Rosneft of around 70 billion. The deal represents 15 million metric tons of crude oil annually for 25 years, at just over $10 billion each year. The oil will probably go through the existing Eastern Siberia-Pacific Ocean (ESPO) pipeline to Daqing, China
Rosneft will also sell LNG (liquefied natural gas) from a terminal it is planning with Exxon Mobil on Sakhalin to Japanese trading firm Marubeni and the Sakhalin Oil and Gas Development Company, another Japanese company.Enjoying this article? Click here to subscribe for full access. Just $5 a month.
Novatek, an independent gas producer, has meanwhile granted CNPC a 20% stake in its LNG project on the Yamal Peninsula in the Arctic. CNPC will become an “anchor customer” and import 3 million tons of natural gas annually.
It is worth observing who got what from these deals to determine their significance.
In Japan’s case, the deal with Rosneft clearly betokens a gradually improving energy and political relationship between Russia and Japan and probably presages other future deals – if a Russo-Japanese peace treaty and determination of the Kurile Islands can be signed and if Japanese concerns about Russian business can be allayed. This deal also hints at a growing Russian – or at least Rosneft – capability to sell LNG, an area where Rusia has lagged and which has cost it significantly as the international gas market changes. To the degree that it can develop an indigenous LNG capacity Russia benefits, especially in East Asia.
But while Japan gains modestly and has hopes for the future, Gazprom – the leading gas company in Russia and chief rival to Rosneft and Novatek – has lost again in these recent deals. Although it says it is pivoting to Asia, there is still no gas deal with China despite constant announcements that one was forthcoming. The giant may be setting up a special-purpose company to manage development of a 15 million-ton LNG facility in the Far East, but Gazprom is clearly well behind its rivals in that region. Indeed, Gazprom’s entire record, going back a decade, has revealed a consistent stubbornness when it comes to selling gas of any kind to the Far East, a factor that has allowed its rivals to steal several marches.
Just as Gazprom has lost a round, there appear – at least at first glance – to be significant advantages for Novatek and Rosneft. These companies will now be allowed to sell LNG abroad, signaling an end to Gazprom’s monopoly on gas exports. Moreover, they will clearly be active in the Arctic, the next great frontier of Russian energy, and with Chinese as well as Western companies.
Rosneft in particular benefits in a number of ways. Rosneft and Transneft had already secured $25 billion from China in 2009 to build the ESPO oil pipeline and cover their very high indebtedness. With the recent acquisition of TNK-BP, Rosneft once again incurred huge debts that this prepayment will alleviate. Reportedly, it faced debt maturities between now and 2015 of $6.6 billion, $15.9 billion and $16.2 billion annually, so this new infusion greatly improves its balance sheet and allows it to show a real cash position, even though its working capital will be negative. This could attenuate future financing risks.
In addition, Rosneft is clearly now the primary energy provider and exporter for the Far East and Asia. As this area becomes ever more vital a market for Russia, Rosneft’s political standing vis-à-vis its declining rival Gazprom will probably grow.
Yet there are warning signs here for Rosneft. Once again China has had to bail it out of huge debts, while the Russian firm builds enormous energy infrastructure that goes only to China. For its part, China possesses many other options for its oil and gas, including the Middle East, Australia, Indonesia, Central Asia, and its own indigenous holdings, which include sizable shale deposits that are already being studied. If Russia remains unable to build pipelines to Japan and South Korea, it will be China that owns the existing pipelines in Asia, as well as any future pipelines built to it. Russia may make money but it will be China that has the real leverage.
Indeed, the real winner here is China. Of course, Russia gets lots of money (which, if the recent past is any judge, it will waste) and makes major deals with China, but it has still proven itself unable to make anything other than modest deals with anyone else in East Asia.
Russia is attempting to get Western partners, Japan, South Korea, India and even Vietnam to invest in its Asian energy structures, but it has only had real success with China. That outcome naturally produces an unbalanced situation with potentially negative future political and economic implications. Certainly Russia will not have the market leverage on China that China is steadily building over Russia.
Indeed, these recent agreements, coming on top of earlier ones signed in March, now ensure China access to the Arctic fields of both Novatek and Rosneft, enhancing China’s economic and political position in this crucial sector. Novatek is unlikely to be able to enforce a price on China; quite the contrary given the abundance of Chinese sources from other producers. In fact, the Yamal project may come to depend on Chinese financing, not necessarily an optimal outcome.
Chinese sources now report that growing political contact will encourage more large deals with Russia. Already the recent contracts give China another leg up on its rivalry with South Korea and Japan in the Russian Far East. China also stands to profit handsomely in financial terms given the loans it has already made to Rosneft and the terms under which Rosneft must now operate.
And those benefits for Rosneft, and indeed Russia? A closer look raises some serious questions. As The Moscow Times reported recently, Rosneft will need to find a way to increase the carrying capacity of the pipeline to China, and find the oil to fill it. Ultimately the funds and supply to meet these demands are likely to be at the expense of the Russian consumer. As the paper reports, Rosneft has already stopped fulfilling its obligation to supply a refinery that produces gas for the domestic market.
Meanwhile, as we have noted, the balance of need between China and Rusisa heavily tilts in China’s favor, because Russia and Rosneft need its purchases much more than China needs them. While this deal undoubtedly boosts China’s oil and LNG supplies as well as its ties to the Arctic and leverage over Russia, can Rosneft meet its new responsibilities? And even if it does, does Russia really gain in Asia beyond what it already had?
The conventional refrain is that time will tell, but this seems to be another case where Rosneft has been able to persuade Beijing and Moscow that what’s good for Rosneft is good for Russia. That’s a contention that remains decidedly unproven.