Is it all about the gas?
CEFC’s investment in Rosneft should bring badly needed financing to Russia’s largest oil company
Private Chinese firm CEFC China Energy may be investing $9.1bn in a stake in Rosneft, Russia's largest oil company, but the lure of gas may be just as important as for oil.
The energy and financial conglomerate obtained preliminary approval in late September to buy a 14.16% stake in Rosneft from a consortium of Glencore and the Qatar Investment Authority. The deal is the largest ever direct investment by a Chinese entity in Russia.
Under the terms of the agreement, Rosneft has pledged to give CEFC access to its oilfields and petrochemical projects in East Siberia, not far from the border with China. Rosneft executive Mikhail Leontyev told local business newspaper RBK daily that the company is discussing cooperation with CEFC in oil production in East Siberian greenfields, such as Suzunskoye—notably to bring in funding.
"They have the means to attract financing at acceptable and comfortable conditions for us," said Leontyev.
Access to cheaper funding certainly is a priority for Rosneft, which has been hamstrung in accessing western capital markets, since it was sanctioned by the US and the European Union over the Kremlin's interference in the Ukraine conflict.
The Chinese firm said the deal "reflects the strong faith of CEFC in the quality resource base of Rosneft, the competitive advantages in the industry and the strength of its management".
CEFC paid a premium of about 16% above the market price for the stake and analysts believe it may have received preferential terms for Russian oil supplies.
What wasn't immediately discernible about the transaction is that it strengthens Rosneft's hand in negotiations aimed at securing access to Gazprom's export pipelines for other producers.
Only Gazprom currently has the right to export gas but Rosneft, headed by Igor Sechin, an ally of President Vladimir Putin, has been lobbying intensively lately to change that so his company can grow globally.
"This CEFC deal is a positive development for independent gas producers, which have long since lobbied for the liberalisation of gas exports," says John Walsh, analyst at Alfa Capital in Moscow. "Gazprom has tried to prevent such legislation being implemented."
In May 2014, Gazprom completed its historic $400bn deal to supply 38bn cubic metres of gas each year to China. Rosneft would like to get in on the act and supply some of the contract volume, but Gazprom has repeatedly stated that independents won't be allowed to export gas via its Power of Siberia pipeline. However, CEFC may push to liberalise gas exports, so Rosneft and its Chinese partner will be able to
independently export gas at cheaper prices.
Rosneft's Vankor cluster of fields in Siberia has vast oil reserves, but gas is also present there. Leontyev says the partnership with CEFC will provide an opportunity to "monetise gas that is not currently used in this region".
In July, Rosneft also entered into a cooperation agreement with China's Bejing Gas, which includes the possibility of supplying to the Chinese market.
CEFC has evolved in recent years from an oil trader into a sprawling $25bn conglomerate with strong political ties. Founded in 2002 by its current chairman Ye Jianmin, CEFC is believed to belong to him although little is known about how he gained his wealth. Although the company insists it is private, its corporate structure suggests that it is managed as a state organisation-not so dissimilar to Rosneft.
The company's website says its "unique" management model combines "trade economy, Confucianism and military-style management".
CEFC has been extending its scope in the Russian economy since the Rosneft deal. Local media reported that the Chinese investor may buy a 5% stake worth up to $400m in the upcoming initial public offering of oligarch Oleg Deripaska's EN+ holding, which controls assets in Eastern Siberia, including a utility and 48% of Hong Kong-listed aluminium producer Rusal.
Whether Rosneft and its Chinese partner can prise open Gazprom's export pipelines can probably only be decided by Vladimir Putin.
In July, Sechin ratcheted up the pressure when he complained to deputy prime minister Arkady Dvorkovich that his firm was not getting access to the Siberia Power pipeline, arguing that it has its own gas for deliveries to China.
In a letter to Dvorkovich, Sechin said that Rosneft has deposits with aggregate gas reserves of over 1 trillion cm in the south of Eastern Siberia and in Yakutia, and the production potential of about 16bn cm of gas per year.
On 3 October, energy minister Alexander Novak told Vedomosti newspaper that the government is maintaining Gazprom as the export monopoly. Ultimately, it's up to Putin to decide whether breaking the monopoly will help finesse Russia's deepening relationship with China.