Russia turns to new friends from China and the Middle East

Hit by US and EU sanctions, Moscow has welcomed energy investment from China and Saudi Arabia

BE2C2 Report — Russia’s energy sector is said to be struggling to find cash and partners due to crippling western sanctions imposed as a result of the Ukraine crisis.

According to the Financial Times, the Kremlin-controlled oil company Rosnet has found alternate support from the east– next door from China, which also has cash to invest in capex-heavy (capital expense heavy) drilling projects.

China Energy reportedly agreed last month to pay $9.1bn for a 14.16 per cent stake in Rosneft — and it is not the only Russian company to find new friends in China.

Chinese companies are snapping up stakes and signing joint venture agreements across Russia’s energy sector, says FT. And they have competition — Saudi Arabia’s new-found friendship with Russia has started yielding corporate agreements, too. The kingdom has committed more than $10 billion for investment in Russia including its energy assets.

Three years ago, western sanctions imperilled the Arctic LNG project in Russia’s northern Yamal peninsula owned by Russia’s Novatek and France’s Total. Chinese finance came to the rescue with a $12bn package. Today, Russian officials are keen for Saudi companies to play their part in a second iteration of the project called Nord Stream 2. The gas pipeline to Europe is being built by the Moscow-controlled gas monopoly Gazprom, and five EU energy companies have agreed to finance half of its cost.

Hit by US and EU sanctions after its 2014 invasion of Crimea, Moscow has turned to Beijing and the Middle East for friendship and finance. Assistance was both necessary and geopolitically expedient: New York and London are not the only places with banks, went the message. Then when oil prices fell to historic lows two years later, cutting a deal with Saudi last year— the world’s other crude-exporting superpower — to reduce production helped reverse the slide and ease Russia’s struggling fiscal budget calculations.

But while sanctions may have prompted the agreements, business realities help explain Chinese and Saudi corporate partnerships. For Chinese energy companies, Russia offers both vast resource supply and handy proximity. For Saudi Aramco, the Kingdom’s state-owned hydrocarbon giant, Russia offers potential partners struggling with the same existential business quandaries — how to extract more for less, and tackle the threat of alternative energy sources.

Also read: King Salman Begins Historic Trip to Russia –First Ever Visit By a Saudi Monarch

China needs energy and power to fuel its growth, and shares a 4,200km border with Russia. For the Russians, having a major customer in the east makes good business sense: oil and gas from fields in the far east would need to be pumped across as many as 11 time zones and 7,000km worth of frozen tundra, forests and mountains to reach Europe. China is next door and, as a bonus, has cash to invest in capex-heavy drilling projects.

Over the past 18 months, Chinese companies have spent more than $14bn on Russian energy projects. China now owns stakes in Russia’s largest oil company, petrochemical group and gold producer. By next month, CEFC will add a $500m investment in energy-to-aluminium business EN+ as part of the company’s $1.5bn listing in the London stock exchange. “The Chinese think long-term, they think very strategically,” said a person involved in one of the investments. “They want access to the resources, but they are also thinking about partnerships that will last decades.”

In Riyadh, energy executives share the same fears as their opposite numbers in Moscow, report FT. A future world of $50-a-barrel crude prices means drilling, pumping and refining must become more efficient and less expensive. It is no surprise says FT that one of dozens of corporate agreements signed during King Salman bin Abdulaziz’s state visit to Moscow last week was for Aramco and Gazprom Neft, the oil arm of Moscow-controlled gas monopoly Gazprom, to collaborate on research and development.

“This is just the beginning,” said Ibrahim Al-Omar, governor of the Saudi Arabian General Investment Authority. “We are [in Russia] to meet people, to shake hands, to find all the ways in which companies from our two countries can work together,” he said. “There is vast potential.”

Gazprom appears unflustered by the prospect. “In addition to Europe, the Asia-Pacific Region also exists, and certain funds can be borrowed from there,” said chairman Viktor Zubkov last month. US and European energy companies have long been Russia’s go-to partners and financiers for major energy projects. But that relationship may well be coming to an end.

Meanwhile, Saudi Arabia and Russia are currently leading consultations between the Organization of Petroleum Exporting Countries and other major suppliers about the future of their agreement to cut oil output,  OPEC Secretary-General Mohammad Barkindo said Sunday in New Delhi. The pact expires in March, and oil producers are debating whether to extend it later into the year.

OPEC plans to meet on November 30 in Vienna to assess the market and its production policy. UAE Energy Minister Suhail Al Mazrouei said the production cuts have led to a decline in crude inventories and a better balance in the oil market.

Al Mazrouei said he’s optimistic that the next OPEC meeting will lead to a consensus between the group and its non-OPEC partners that will help balance the market in 2018, according to a tweet.

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