China’s Confidence in Long Term Value of Oil: Chinese Takeover of Russian Oil

From Robert Amsterdam’s insightful blog, an interesting analysis of recent high level agreements between China and Russia in the energy field.  As the article notes

“…First let’s review what China is throwing into Russia, and what they expect to receive in return. Under significant pressure to refinance company debt, state-owned oil company Rosneft has managed to negotiate a possible export-backed loan from China in the range of $20-25 billion, which could account for about two billion barrels of oil to be sent to China over the next 20 years (4% of the country’s demand).

This is significant in that Rosneft and China’s state-owned CNPC has been quietly bickering for years over an agreeable price for oil – as the Russians would prefer to sell both its oil and gas at European rates to Asia, something that the Chinese have long resisted as an economy of scale. It appears that a combination of Russia’s debt crisis and the sudden plunge in oil prices have forced the Kremlin to accept the Chinese terms.

The “considerable” loan deal may also help speed up the long-awaited construction of the East Siberia-Pacific Ocean (ESPO) pipeline, a project which has been talked about for many years (even Mikhail Khodorkovsky at one point was trying to push for it) yet very little in terms of progress has been achieved.  Oil and Gas Journal is reporting that a deal has been signed between Transneft and CNPC to build an additional 67-km, 300,000 b/d pipeline spur coming off the ESPO from Skovorodino, Russia to Daqing, China at a cost of $800 million.

It should come as no surprise that the one man in charge of negotiating all these political, investment, loan, energy, pipeline, and credit deals with the Chinese is none other Deputy Prime Minister Igor Sechin, who also happens to be the CEO of Rosneft.

…But dollars are definitely one thing that the Chinese have in surplus, with a $1.9 trillion currency reserve by far making them the largest holders of liquidity in the world right now. In this spate of deals, most analysts appear to be viewing the Russians as the party desperate for liquidity (Rosneft has about $21 billion in debt to creditors demanding early repayment), while Beijing is enjoying a good deal of leverage to staple down much needed energy supplies to feed their growing (if slowing a bit) industry.

I have some colleagues working in the finance sector who have been eagerly awaiting a decision like this from the Chinese, who after patiently waiting throughout this crisis and keeping their chips off the table (despite bargain basement deals on U.S. investment banks) have finally revealed where they still have confidence – the long term value of oil.

The global economy certainly needs this long awaited shot of liquidity, which will eventually in theory pass through Rosneft into the system, but one has to question whether Beijing can trust the Russian government to hold up their end of the deal once oil prices rise again and become irresistible to the bureaucrats – a lesson learned the hard way by everyone from Yukos to BP. But on the other hand, the Chinese have gotten burned badly from their past attempts to get into the United States through investment bank stakes, making it understandable why they have avoided helping in the bailout effort as though it were the plague. But they would be mistaken to think that this investment in the Russian regime isn’t without its own risks.

I view this embarrassing deal as a very important event, which illustrates how poorly the Russian authorities have managed the country’s development during the oil boom. There is no reason why Russia should find itself in such a terrible position, down on one knee, where they have to ask the Chinese for +$20 billion in exchange for disadvantageous oil deals. It strikes me as more than slightly ironic that these very leaders which have fought so hard to resist and confront the abuses of their relations with Europe and the West should so easily hand the country’s future over to Beijing.”

This entry was posted on Thursday, October 30th, 2008 at 1:21 pm and is filed under China, Gazprom, Rosneft, Russia.  You can follow any responses to this entry through the RSS 2.0 feed.  You can leave a response, or trackback from your own site. 

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Wildcats & Black Sheep is a personal interest blog dedicated to the identification and evaluation of maverick investment opportunities arising in frontier - and, what some may consider to be, “rogue” or “black sheep” - markets around the world.

Focusing primarily on The New Seven Sisters - the largely state owned petroleum companies from the emerging world that have become key players in the oil & gas industry as identified by Carola Hoyos, Chief Energy Correspondent for The Financial Times - but spanning other nascent opportunities around the globe that may hold potential in the years ahead, Wildcats & Black Sheep is a place for the adventurous to contemplate & evaluate the emerging markets of tomorrow.