On 18 October state-owned Russian oil firm Rosneft signed a memorandum of understanding with state-owned China National Petroleum Corp., a significant arrangement that gives China its first direct access to East Siberia’s rich hydrocarbon fields for joint development.
The MOU builds upon a deal signed in June in the presence of Russian President Vladimir Putin and Chinese Vice Premier Zhang Gaoli, which saw Rosneft receive a $70 billion upfront payment from CNPC for its promise to raise exports by 300,000 barrels per day.
Among the oilfields to be shared with CNPC is eastern Siberia’s Srednebotuobinsk field, which only began producing oil earlier this month. Srednebotuobinsk field was previously owned by Taas-Yuryakh Neftegazodobycha, whose license to develop the field Rosneft only fully acquired four days before the MOU was signed.
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Under terms of the MOU Rosneft will have a controlling stake of 51 percent in the future joint venture, while CNPC will own 49 percent. Rosneft President and Chairman of the Management Board Igor Sechin said, “The memorandum is another step in developing the strategic partnership between Rosneft and CNPC in various areas of cooperation. Our balanced strategic position will enable us to jointly develop and produce hydrocarbons, procure execute long-term supplies, jointly construct refining capacity and manage various assets. The development of East Siberia resource base will create additional opportunities for supplying Rosneft’s current and future refineries, including Komsomolsk refinery, Far East Petrochemical Company and Tianjin refinery, which will help meet growing demand for petroleum products in East Siberia and the Far East, as well as increase exports to China and Asia-Pacific region. The agreements reached prove once again that Rosneft has a sufficient resource base to meet its strategic goals. The participation of our long-term partner in exploration and production activities will help speed up the launch of production at Taas and will facilitate the expansion of cooperation with CNPC in other areas.”
An added bonus for CNPC is that the Srednebotuobinsk deposit is close to the Eastern Siberia-Pacific Ocean pipeline, which became operational in 2011. Rosneft currently delivers 300,000 barrels per day of oil to China via an ESPO pipeline spur, the Skovorodino-Mohe pipeline. Seven months ago Rosneft signed a new contract with CNPC to supply an additional 360 million tons of oil over the next 25 years, which stipulated that the flow capacity of the Skovorodino-Mohe pipeline should be doubled to 30 million tons per year by 2018 and earlier this year agreed to double supply volumes provided via ESPO. Rosneft said the Srednebotuobinsk field has oil and gas condensate reserves of more than 134 million tons and over 155 billion cubic meters of natural gas. According to the MOU, the Srednebotuobinsk oil will first meet energy demands in eastern Russia and then be exported to China and other Asia-Pacific countries.
Which brings up the question – why is Rosneft willing to share such a potentially lucrative field like Srednebotuobinsk?
Simple – debt.
The Russian government owns a 69.50 percent share in Rosneft, which has total proved hydrocarbon reserves of 22.8 bln barrels of oil equivalent. Interestingly, BP owns a fifth of Rosneft, which became the world's largest listed oil firm by output after acquiring BP's venture in Russia, TNK-BP, in a deal valued at more than $50 billion. The downside of the buyout was that it left Rosneft heavily indebted, searching for deals to lighten the red ink on its balance sheet by reducing its debts to banks.
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The news of the MOU produced a bounce on Russia’s stock market, but nationally recognized statistical rating organization Fitch Ratings Ltd. was less impressed, saying in a statement, “Fitch Ratings has downgraded Russia-based OJSC OC Rosneft's Long-term foreign and local currency Issuer Default Ratings (IDRs) to 'BBB-' from 'BBB' and removed them from Rating Watch Negative (RWN).”
What remains beyond dispute is, now that China, flush with cash, has acquired a share in Russia’s upstream activities, it is not likely to be Beijing’s last such deal with Moscow.
By. John C.K. Daly of Oilprice.com