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.
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.
