China deepens oil ties with Russia in US$9-billion Rosneft deal

A closely-held Chinese oil company has agreed to buy a minority stake in Rosneft PJSC for about US$9 billion, deepening energy and political ties with Russia amid increasing tensions with the US.

 

The deal sees Glencore Plc and Qatar’s sovereign wealth fund selling most of their holding in Russia’s biggest crude producer, which they acquired amid much fanfare in December.

 

The commodities giant run by Ivan Glasenberg is making way for CEFC China Energy Company — little known even within the energy industry — while retaining its prized access to millions of barrels of Russian oil exports.

 

“We are happy that it was specifically a Chinese corporation,” Rosneft CEO Igor Sechin said on state television station Rossiya-24.

 

CEFC will buy a 14.16% stake in Rosneft from a joint venture between Glencore and the Qatar Investment Authority for about US$9 billion. In turn, Glencore and Qatar will use the proceeds to pay down the debt they contracted to buy their initial stake just nine months ago for about US$12 billion. Glencore will retain a 0.5% stake and Qatar a 4.7% stake.

 

The participation of CEFC marks a departure from tradition, as Beijing has relied in the past on state-owned China National Petroleum Corp. and China Petroleum & Chemical Corporation, also known as Sinopec, to buy stakes in foreign energy companies.

 

Deal questions

The structure of the deal and the speed at which the transaction with CEFC was announced raise questions about why Glencore and Qatar bought the stake last year in the first place.

 

At the time of that deal in December, politician Grigory Yavlinsky accused the government of rushing the sale to help finance the 2016 budget, with the two companies holding a stake until a final buyer could be found.

 

The political importance of the transaction was evident in April, when Russian President Vladimir Putin awarded the Order of Friendship, a top state honour, to Mr Glasenberg, Qatari royal Sheikh Abdullah Bin Mohammed Bin Saud Al Thani and bankers involved in the transaction.

 

“I want to express my confidence that your business in Russia will develop and will develop successfully,” Mr Putin said at the time.

 

Just five months later, Glencore has sold most of its stakes, but nonetheless retains a prized side-deal with Rosneft to trade Russian crude that was part of the initial transaction in December, said the person familiar with the matter. Glencore currently trades about 400,000 bpd pumped from Rosneft, the person said, asking not to be named because the details are not public.

 

Prized market

Rosneft shares rose 2.9% to 314.95 roubles in Moscow. Glencore slipped 1.5% to 363.05 pence in London. The sale price — a premium of 16% to the 30-day volume-weighted average price of Rosneft shares on the 8th September — is equivalent to about US$9.1 billion, said Alexander Burgansky, an oil analyst at Renaissance Capital.

 

Russia has muscled its way into the prized Chinese energy market over the last five years, elbowing aside traditional stalwarts Saudi Arabia and Angola. Moscow has been the top crude supplier to China for most of the year and now plans to start supplying natural gas by pipeline in 2019.

 

“This deal intensifies the energy relationship between Russia and China,” Christian Boermel, a senior analyst with oil consultant Wood Mackenzie in London. “Rosneft keeps its customers close to its heart — buy a stake, get an oil supply agreement.”

 

CEFC, founded by Chairman Ye Jianming in 2002, has expanded from a small fuel oil trading operation into a larger company, owning oil and gas production assets, as well as terminals and storage in Central Asia, the Middle East, Europe and Africa.

 

The Chinese company is not only establishing a presence in Russia. In February Abu Dhabi National Oil Company awarded CEFC a 4% stake in an onshore venture that includes China National Petrol Corporation, the Asian nation’s biggest producer, as well as BP Plc and Total SA, Japan’s Inpex Corporation and South Korea’s GS Energy. In March, it agreed to buy a stake in the US broker Cowen Group Inc.

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In September, CEFC and Rosneft signed an agreement for the long-term supply of Russian crude oil to China. That followed a cooperation agreement in July that included an option for CEFC China to buy into the Russian company’s retail business. They were also looking at developing joint exploration and production projects in Siberia.