China Boosts Role in Russian Oil Sector

An anlysis by Michael Lelyveld
2016-06-20
Email story
Comment on this story
Share story
Print story
  • Print
  • Share
  • Comment
  • Email
A worker rides a bicycle at a Sinopec oil refinery in Wuhan, Hubei province, in a file photo.
A worker rides a bicycle at a Sinopec oil refinery in Wuhan, Hubei province, in a file photo.
AFP

China is seeking unprecedented access to Russia's energy sector with a demand for a management role in the state-owned oil company Rosneft.

In an interview with Rossiya-24 television on May 30, the chairman of China National Petroleum Corp. (CNPC), Wang Yilin, raised the prospect of buying a large block of Rosneft shares in the company's upcoming partial privatization.

CNPC already has a small stake in Rosneft, acquired during an initial public offering in 2006, Wang said. The government plans to sell 19.5 percent of Rosneft shares this year, reducing the Russian state's holding to just over 50 percent.

"If Rosneft makes a proposal, we will intensively study it. There is interest on our part and we will study the possibility of increasing our shareholding in Rosneft," said Wang, according to Interfax.

But Wang made clear there would be strings attached, saying that "in the event of an increase in the stake, we would want to receive the right to participate in management of the company, naturally in full accordance with the stake acquired."

One day later, Economic Development Minister Alexei Ulyukayev told reporters that a management role for CNPC would be possible with a seat on Rosneft's board of directors, depending on the size of its holding.

"Of course, if they will have a stake that will put them on the board of directors, then of course they will," Ulyukayev said.

Speaking on the sidelines of the St. Petersburg International Economic Forum last week, Energy Minister Alexander Novak repeated that the Rosneft sale would be open to China, but he made no mention of the board seat, perhaps reflecting the sensitivity of the issue.

"In principle, we admit that big companies may participate in (the Rosneft) privatization, including Chinese companies," Novak said, as reported by the official TASS news agency.

A seat on Rosneft's nine-member board would represent CNPC's deepest penetration into Russia's energy sector, which has gradually opened to Chinese investment after keeping it at arm's length for years.

‘Smoke and mirrors’

Edward Chow, senior fellow for energy and national security at the Center for Strategic and International Studies in Washington, said it is still unclear whether a sale to CNPC, or any Rosneft share sale, will take place.

“I don't know how much of this is real and how much is smoke and mirrors," Chow said in an interview, noting that Rosneft's chairman Igor Sechin has argued against privatization if prices are low.

Rosneft's shares have risen this year on the Russian market but they remain 35 percent below 2013 highs in international trading in London, reflecting low oil prices and western sanctions over the war in Ukraine.

"From Rosneft's standpoint, there are very few buyers out there other than maybe the Chinese, and given the limited competition, the share price is likely to be very low," Chow said.

India is also a possibility, but it has downplayed competition with CNPC for a deal with Rosneft.

"We are not rivals," Indian Oil Minister Dharmendra Pradhan told Bloomberg News last week.

Thanks in part to major supply deals with Rosneft in 2009 and 2013, China became Russia's biggest oil buyer last year, making a sale to CNPC an arguably natural fit.

China's crude imports from Russia rose 28 percent last year to an average of 852,000 barrels per day, Platts energy news reported, citing Chinese customs data.

For over a decade, Rosneft has turned to CNPC and Chinese banks for prepayments and loans to finance its growth.

In 2005, Rosneft used a U.S. $6-billion (39-billion yuan) loan from CNPC to take over the main unit of Russia's embattled Yukos oil company. In 2013, Rosneft sought up to U.S. $70 billion (459 billion yuan) in CNPC prepayments to buy out rival producer TNK-BP.

But years of hard bargaining and distrust have slowed cross-investment and construction of pipelines between the two neighbors, despite the natural fit of a giant oil producer with a leading consumer next door.

After years of negotiations and development, Russia has opened only one oil pipeline to China, while its first gas pipeline is still in the works.

Extending its reach

Since 2013, China has extended its reach into the Russian energy sector, most notably with CNPC's acquisition of a 20-percent stake in independent Novatek's U.S. $20-billion (131-billion yuan) Yamal LNG venture. China's Silk Road Fund has taken an additional 9.9 percent of the project to produce liquefied natural gas in the Arctic region.

But CNPC's bid for a Rosneft board seat may mark a new chapter in Sino-Russian energy relations.

Chow agreed that such a demand, made publicly on Russian television, would have been unthinkable a decade ago.

A single seat is unlikely to give China much influence over Rosneft management decisions, but the demand reflects the relative economic strengths between the two countries as Russia slogs through recession while China copes with slowing growth.

Despite China's troubles, its gross domestic product rose at a 6.7-percent rate in the first quarter, according to official figures, while Russia's GDP fell 1.2 percent. Last year, China's GDP grew at an official rate of 6.9 percent, while Russia's dropped 3.7 percent.

One measure of how much Russia wants a deal for the Rosneft shares is a statement by Ulyukayev last month that the revenues are needed to keep this year's budget deficit from exceeding 3 percent of GDP.

"Only in Rosneft's case will money go directly into the budget, and so the budget deficit will decrease," the minister said, indicating that the sale is the largest of Russia's planned privatization offerings.

In the first five months of the year, Russia's budget deficit hit 4.6 percent of GDP, the Finance Ministry said last week.

"The main thing is for Rosneft to be there in order to balance the budget. It is weightier than the others. The 19.5 percent of Rosneft would now fetch more than 700 billion rubles (U.S. $10.8 billion, 71 billion yuan)," Ulyukayev said, according to Interfax.

Willing to pay that much?

Whether CNPC would be willing to pay that much for a minority stake is uncertain in the current market.

In February, the Russian Finance Ministry said the sale would fetch only 490 billion rubles, or 30 percent less. The government has debated the Rosneft share sale since at least 2009.

CNPC's demand for a board seat may reflect Chinese government pressure on its national oil monopolies to act more like commercial companies as part of its push to reform state-owned enterprises (SOEs).

Gone are the days when CNPC would finance Russian ambitions without seeking something more in return, or so Wang's televised statement may have been meant to suggest.

Second-ranked China Petroleum & Chemical Corp. (Sinopec) has also voiced interest in the Rosneft shares, if the price is right, Interfax reported separately.

"We're ready to take part in the privatization of Russian oil and gas assets if the terms are economically viable," said Dai Liqi, Sinopec vice president for planning and development.

"Our possible participation would depend (on) how the Russian government intends to carry out privatization and what stakes are offered to the company," Dai said.

The statement did not mention Rosneft by name or the possibility of a seat on the board.

Appearance of competition

Although the Sinopec interest may give the appearance of competition with CNPC, Chow said that China's government would not want two state companies to bid against each other and drive up the price.

In addition to the Rosneft privatization, Russia is planning to sell the state's 50-percent interest in second-tier oil producer Bashneft, based in the southern Urals republic of Bashkortostan, in the second half of this year.

Sinopec bought 6 million metric tons (44 million barrels) of Urals oil last year, a company official said in another Interfax report. In 2013, Rosneft and Sinopec signed a protocol for supplies of up to 100 million tons (733 million barrels) over 10 years.

Negotiations with Sinopec have taken place on several fronts, but reports suggest progress is dependent on pricing and terms.

Officials said Sinopec is interested in Russian LNG purchases and petrochemical projects. The company is seeking improved terms from Rosneft for joining in development of two major Siberian oilfields.

Sinopec has also considered increasing its holding in Sibur, a Russian gas processing and petrochemicals company, from the current 10 percent to 20 percent. The Silk Road Fund and China Development Bank could acquire an additional 10 percent, according to a preliminary agreement signed last month.

In another sign of China's drive to deepen its involvement in Russia's energy sector, CNPC has reportedly pressed gas monopoly Gazprom to accept a joint development, operation and sales plan for a proposed gas pipeline from Western Siberia across Russia's mountainous Altai territory through Xinjiang.

Gazprom is said to be resisting due to concerns about low state-controlled gas prices in China, preferring to sell its gas at the Russian border instead. Moscow has been pushing the Altai project for the past decade.

The Russian company recently assured CNPC that it will meet its commitment to start pumping gas to China from its mammoth 3,000-kilometer (1,864-mile) Power of Siberia pipeline project on an eastern route in 2019. But progress has been slow.

Only about half of Gazprom's planned spending on the pipeline has taken place, and Russia has so far failed to persuade China to finance the project with prepayments and loans.

Comments (1)
  • Print
  • Share
  • Email

Anonymous Reader

As Mr. Chow said, a seat on the board can't influence much. I think China wants more than a seat at board of directors table. The Chinese want insight in the Russian company so it could better with them in future deals, given not so good dealing with the Russians in the past.

Jun 20, 2016 12:18 PM

CH. 1: MANDARIN | CANTONESE

CH. 2: VIETNAMESE | BURMESE | KOREAN

CH. 3: KHMER | LAO | UYGHUR

CH. 4: TIBETAN

More Listening Options

View Full Site