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The decision by Rosneft, Russia’s largest oil producer, to buy 49 percent of India’s Essar Oil demonstrates Moscow’s determination to fight Saudi Arabia for market share in Asia and to help mitigate the impact of Western sanctions.
Essar, based in Mumbai, owns the Vadinar oil refinery in the country’s westernmost state of Gujarat. It is India’s third largest refinery. Previously, Rosneft had contracted for $6 billion to supply the facility with 200,000 barrels a day for the next decade.
Russia’s state-owned oil giant aims to devote 40 percent of its crude oil exports to markets in Asia by 2019, up from about 33 percent now, in part to sidestep Western sanctions and in part to capture market share in a region that will account for much of the world’s increasing oil demand.
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“The deal will, of course, allow Rosneft to cement its position there and help to get more market share from Saudi Arabia, though we have to look at the prices,” Sergei Pigarev, an energy analyst with Rye, Man & Gor, a securities firm in Moscow, told Reuters. “How much is Rosneft is paying?"
The answer to that isn’t known yet, but whatever the amount, Russia seems to be winning that contest. In May, Russia and Angola became the biggest suppliers of crude oil to China, supplanting Saudi Arabia. Riyadh also has fallen to Nigeria as the leading oil supplier to India.
And those two countries matter greatly in the world of energy economics, Pigarev said. “India and China are the two most interesting markets both for crude oil and oil products. Those are colossal markets in terms of population.”
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Such a move is essential for Russia. The country’s economy relies heavily on energy exports, which have been less lucrative over the past year both because of the rapid drop in oil prices and the sanctions imposed on it by Western nations because of its unilateral annexation of the Crimean peninsula in neighboring Ukraine and its suspected participation in the civil war there.
Most of Rosneft’s crude is processed by nine refineries in Russia, but it also has interests in similar facilities in Italy and Germany, which may one day be the subject of expanded sanctions. The Western penalties have been imposed on Russian companies and individuals, including Igor Sechin, Rosneft’s CEO and a close associate of Russian President Vladimir Putin.
These sanctions include limitations on travel visas and restrictions imposed on Russian companies seeking access to Western currencies. They also forbid Western companies to provide Russian oil companies with the technology to produce oil from unconventional sources, such as the Arctic Ocean.
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Further, profits from oil and gas sales make up about half of the budget revenues for the government in Moscow.
So far the sanctions have had little or no effect on these sales, at least not yet, but at least one financial research company believes the Essar deal may be a hedge against future Western penalties.
“The rationale for the deal appears to be finding a new long-term market for Rosneft’s crude outside of the EU to minimize the risk of disruptions,” the Moscow-based bank Uralsib Capital said in a report on the Rosneft-Essar agreement.
By Andy Tully of Oilprice.com
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Andy Tully is a veteran news reporter who is now the news editor for Oilprice.com