Bottom Line: An emerging joint venture between Russia’s Rosneft and Azerbaijan’s state-run SOCAR poises the Azeri company to enter an even bigger league.
Analysis: In mid-August, we saw Rosneft heads and SOCAR officials sign a framework agreement for Russian oil and gas field exploration and development that extends not only to Azerbaijan, but also to other countries, for five years minimum. Not only will Rosneft and SOCAR jointly market oil products and share pipelines and export terminals, we could see an asset swap across the board, upstream, midstream and downstream. SOCAR has light oil that the Russians want for their European refineries. SOCAR also has a Singapore-based oil trading house that Russia would love to get its hands on for a bigger market foothold in the East.
Recommendation: This is a major boost for Russia, which so far has a limited presence on the Azerbaijani energy scene, with Lukoil being the only Russian oil company there—and it is privately owned. But even though this initial framework agreement looks to be mostly about oil, we expect to see Rosneft make a play for Azeri gas assets, too, as it has made plenty of indications that it is attempting to diversify from oil into gas. SOCAR is becoming a powerhouse even on its own, though, and we are keeping a close eye on its forays into Turkey (via the TANAP pipeline) and its dealings in Southeastern Europe, particularly with Albania.