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Irina Slav

Irina Slav

Irina is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing on the oil and gas industry.

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Is Russia Pushing Saudi Arabia Out Of Asia?

Russia

Chinese industrial conglomerate CEFC has agreed to buy 14.16 percent in Russia’s Rosneft for approximately US$9 billion. The deal was no surprise as it came on the heels of a Rosneft announcement regarding the sealing of a strategic partnership deal with CEFC, but it is clearly indicative of a continuing warming between Moscow and Beijing that has given the former the upper hand in a race for market share with Saudi Arabia.

True, the Kingdom and Russia have been forging closer ties in recent months, thrown together by the persistent depression in international oil prices. This new coziness also shouldn’t come as a surprise. As Shakespeare put it, “Misery acquaints a man with strange bedfellows.”

Russia and Saudi Arabia may be amicable for the time being, but they are competitors and the most important focus of this competition is the Chinese oil market. As Bloomberg Gadfly’s Liam Denning notes, Moscow and Riyadh are frenemies eyeing the big prize that is China in a world where industrialized nations’ thirst for oil has already been sated, but the thirst of emerging economies such as China is still growing.

The CEFC deal will see the Chinese company buy most of the 19.5-percent stake in Rosneft that Glencore bought last year in a partnership with the Qatar Investment Authority. It will ensure long-term supplies of Russian oil for the Chinese company, which is a major crude oil trader, and a stable stream of revenue for Rosneft.

On a larger scale, the deal is a logical next step in Russia’s Asian pivot. Amid European and U.S. sanctions, Moscow has made the only reasonable move it could, focusing on other markets, incidentally including the two biggest oil demand drivers for the medium term - China and India. Rosneft’s 2016 acquisition of India’s Essar Oil was a major milestone along this road.

Meanwhile, Saudi Arabia is focusing a lot of its energy into convincing various OPEC members they need to take the oil cuts more seriously, discussing another potential extension of the deal, while putting the remainder of its energy into the preparations for Aramco’s IPO.

Related: Can Putin Bring Peace To The Korean Peninsula?

Riyadh also sealed a deal with China North Industries Group Corp. earlier this year for the construction a 300,000 bpd refinery, in addition to inking in a couple more refinery construction contracts in Malaysia and Indonesia.

These projects will require some hefty investment from the Saudis, which is why Riyadh seems to be pinning all its hopes on the Aramco flotation while Russia builds itself a cozy Chinese cushion, locking in future crude demand. In fact, as Denning suggests, Riyadh may very well decide to target Chinese investors for Aramco. The problem is that it is unlikely that they will be willing to pay the price Aramco’s asking price.

So, while Saudi Arabia puts most of its energy into cutting production—which some observers believe is a mistake that would cost it dearly—and preparing the Aramco IPO, Russia is warming up to both China and India, with its oil import share in China growing steadily at the expense of Saudi Arabia.

Saudi Arabia has no time to waste if it wants to regain its share of the biggest growth markets in oil. Both China and India are seeking ways to reduce their reliance on crude and they are putting into place specific plans such as the phasing out of internal combustion engine cars. True, it will be a couple of decades until this starts to have a serious effect on oil demand but it’s worth considering when making plans for long-term economic sustainability.

By Irina Slav for Oilprice.com

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Leave a comment
  • Tom on September 12 2017 said:
    Saudi seem to be refinery, oil cuts and new non oil ventures consistently pointing to the fact they are running out of oil.
  • alex on September 14 2017 said:
    Well...The author probably didn't have space for some tiny details.
    First, RF banks loaned 9B$ to Qatary fund that bought RosNeft's shares.
    Then Qatary fund sold those shares to CEFC. Not clear if it returned the loan yet. Or if it will return this loan at all. So RF banks sponsored the transaction, Qatary fund got the money...
    CEFC? They got shares and they gonna split some of money with the Kremlin cleprocrats via Qatary fund. That all you need to know about "warming" between RF and China :).
    And Rosneft.. think of it's market cap in the light of this deal...omg..

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