Russia Lets China onto Shelf Oil Projects

State-run China National Petroleum Corporation (CNPC) may soon become a key partner of Russia's oil giant Rosneft. According to the latter's press statement, the companies have agreed to work jointly on a number of Rosneft's offshore and on-shore hydrocarbon fields in Siberia and in the north of Russia, including three shelf licence blocks in the Barents and Pechora seas. Documents to that effect were signed in Beijing on 30 May, following Rosneft CEO Igor Sechin's talks with CNPC top management.

According to Rosneft, the Russian state-owned company and CNPC will jointly develop the West-Prinovozemelsky, Yuzhno-Russky and Medynsko-Varandeisky blocks in the Barents and Pechora seas. The on-shore part of the deal includes the major Vankor and Lodochnoe oil and gas fields in Krasnoyarsk Territory, as well as the Verkhnechonsk oil field in Irkutsk Region. It is understood that CNPC will also be granted access to four newly discovered oil fields in Irkutsk Region with combined recoverable reserves of 424.7 million tonnes. Finally, the agreement mentions the Naulskoe field in the Nenetsk Autonomous Area. Rosneft was awarded the Naulskoe licence two years ago.

Alexei Kokin, a senior oil and gas analyst at UralSib Financial Corporation, is convinced that CNPC will get a small share in the aforementioned joint projects. Nikolai Podlevskikh, head of the research department at Zerich Capital Management, assumes that the Chinese partner will end up either holding a minority interest in the fields or helping to operate them.

"One way or the other, their role will be auxiliary," says Podlevskikh. "I believe [that CNPC will be given] access to oil fields of traditional types. It is true that Rosneft has been talking a lot about the possibility of producing oil on the Bazhenov formation for example, and that China appears to be interested in such projects. The problem is that China does not yet have its own shale-oil extraction expertise, so inviting it to work there would not be entirely productive. As far as traditional oil fields are concerned however, the Chinese could indeed help with funding, personnel, technology, and so on."

Economist Andrey Parshev says he can understand Russia's interest in the "lucrative financial offer made by China", but warns that from the strategic perspective, "allowing China to enter Russian oil fields would be a mistake". He explains: "China is interested in Russia economically, because Russia both produces hydrocarbons and supplies them to the Chinese market. If [Chinese companies] are allowed to be doing this for us then we will lose their interest and respect.

"The Chinese are interested in steady supplies, this is why they want to maintain a presence at the oil extraction points. But we must realise that it is a wrong policy [to let Chinese companies near Russian oil fields]. I believe our government should intervene."

Expert Dmitry Abzalov of the Centre for Current Politics says Rosneft is aiming to secure a balance in its cooperation with the partners in the West (ExxonMobil and BP) and in the East (CNPC).

"It is for this purpose that Sechin travels to China and other Southeast Asian countries," Abzalov notes. "China is seriously interested in joint oil production: it is running out of cheap coal and has to diversify its energy sources. This is the true reason for China's interest.

"The agreement with China gives Rosneft a secret weapon in its potential energy talks with South Korea and Japan. Now that China, their main rival in the region, has been granted access to the Russian shelf, these two countries may take an interest in working jointly with Russia on the Kamchatka shelf. In this case [Rosneft] will have some room for bargaining."

Experts describe Rosneft's interest in the Asian market as being fairly logical but note that Asia will hardly become the primary export customer for the Russian giant any time soon. "Asia will certainly be an important market, but it is highly unlikely that Rosneft will be selling half of its [annual] output of 200 million tonnes to that region," says Kokin. "In fact, I don't think Rosneft will be exporting more than a quarter of its yearly output to Asia. Half of the company's overall exports, tops; the rest will be going to Europe."

Abzalov concurs: "It is obvious that Rosneft is diversifying its exports and turning increasingly towards the Asian markets. Nevertheless, Western Europe is still within the scope of Rosneft's interests. The company is trying to balance out its risks. China pays less for crude but at the same time it is prepared to invest more. The European oil prices are higher but much of the revenue stays in Europe. This is why, apart from negotiating supplies, Rosneft also develops associated infrastructure and builds filling stations overseas: the company is trying to get as close to the end user as possible in order to increase its operating margin."

In other words, Europe will remain the primary consumer of Russian oil for the foreseeable future. On the other hand, as supplies to China continue to ramp up, Asia should also come into Rosneft's focus of interest. On 29 May, Rosneft and Japan's INPEX signed an agreement to jointly develop the Magadan-2 and Magadan-3 licence blocks on the Sea of Okhotsk shelf. At the same time the Russian company intends to invite other foreign partners to work on Russia's shelf together. These could include the US-based ExxonMobil, Italy's ENI and Statoil of Norway.

(rbth.asia, edited byTopco)