Even before the OPEC/non-OPEC production cuts took effect in January 2017, Russia had already beaten Saudi Arabia to become China’s single largest oil supplier for 2016. Since then, Saudi Arabia has sacrificed still more of its market share in the prized Chinese market, while Russia has dominated Beijing’s top suppliers’ list for most of this year.
Now Russia’s oil giant, Rosneft—whose chief executive Igor Sechin is a close ally of Vladimir Putin—is reportedly aiming to further increase its crude oil deliveries to China, as Russia looks to boost energy ties with the world’s biggest crude oil importer and top driver of global oil demand growth.
Since the OPEC/Russia oil production deal began, the U.S. has stepped up sanctions on Russia, which made Western banks and companies even more cautious in dealing with Russian firms. Considering this, it’s not a huge surprise that Rosneft and Russia want to boost ties with Chinese firms, refiners, and banks.
Although it’s not immediately clear when that increase will take place, this plan is only the latest in a series of projects that boost Russian oil supplies to Chinese refiners. Chinese firms, on the other hand, recently made big investments in Russian energy projects and firms, including in a large stake in Rosneft.
Chinese industrial conglomerate CEFC recently agreed to buy 14.16 percent in Rosneft for approximately $9 billion. The deal didn’t come as a surprise, coming on the heels of a Rosneft announcement regarding the sealing of a strategic partnership deal with CEFC, but it’s clearly indicative of a continuing warming between Moscow and Beijing that gave the former the upper hand in the race for market share with Saudi Arabia.
Last year, Russia’s Novatek sold 9.9 percent in the Yamal LNG project to China’s Silk Road Fund for $1.3 billion (1.1 billion euro), months after the Silk Road Fund had extended a 15-year loan of $857 million (730 million euro) to the project financing. The same fund also acquired 10 percent in Russia’s gas processing and petrochemicals group Sibur.
In June this year, Beijing Gas Group closed the deal to buy 20 percent in Rosneft’s subsidiary Verkhnechonskneftegaz for around $1.1 billion, obtaining a stake in one of the largest producing fields in Eastern Siberia.
“Corporate partnerships with China are one of the very few alternatives still open to Russian players to finance their expansion ambitions,” Alejandro Demichelis, director at boutique investment bank Hannam & Partners in London, told the Financial Times last month.
While money flows in the China-to-Russia direction, crude oil supplies are flowing in the opposite direction. Chinese refiners are preparing to receive increased volumes of Russian crude oil via the Eastern Siberia Pacific Ocean (ESPO) starting in January next year, when the expansion of the capacity of the ESPO pipeline—which branches out to China—will be complete. Rosneft will increase its ESPO Blend deliveries to PetroChina to 600,000 bpd next year, up by 50 percent compared to 2017.
“Plants were told to be prepared for more Russian oil next year,” a Chinese refinery source told Reuters last month.
Russia and China are growing their partnership and investment links as Moscow scrambles to find ways to fund oil and gas projects that are made difficult under Western sanctions. Russia is also stepping up efforts to secure oil dominance in the Chinese market, grabbing some of the market share of OPEC’s de facto leader Saudi Arabia.
By Tsvetana Paraskova for Oilprice.com
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