March 25 (Bloomberg) -- The Crimean crisis is poised to reshape the politics of oil by accelerating Russia’s drive to send more barrels to China, leaving Europe with pricier imports and boosting U.S. dependence on fuel from the Middle East.
China already has agreed to buy more than $350 billion of Russian crude in coming years from the government of President Vladimir Putin. The ties are likely to deepen as the U.S. and Europe levy sanctions against Russia as punishment for the invasion of Ukraine.
Such shifts will be hard to overcome. Europe, which gets about 30 percent of its natural gas from Russia, has few viable immediate alternatives. The U.S., even after the shale boom, must import 40 percent of its crude oil, 10.6 million barrels a day that leaves the country vulnerable to global markets.
The alternatives to Russia also carry significant financial, environmental and geological challenges. Canada’s oil sands pollute more than most traditional alternatives, while Poland’s promising shale fields have yet to be unlocked. The biggest oil finds of the past decade are trapped under the miles-deep waters offshore Brazil and West Africa.
“You’re going to see the Russians go out and try to sell and you’re going to see the Asian buyers drive hard bargains with Russia,” said Philip Verleger, an energy economist at PKVerleger LLC in Carbondale, Colorado, suggesting European countries will feel the most pain in the form of higher gas prices as they struggle to reduce their dependence on Russia.
As world leaders gathered in The Hague to discuss nuclear security issues, U.S. President Barack Obama sought to encourage Chinese criticism of Russia on Ukraine. Chinese President Xi Jinping in turn pressed Obama about a reported U.S. breach of the servers of China’s largest phone-equipment maker.
China has always held a “just and objective attitude” toward the Ukraine crisis, Xi said in the meeting with Obama, according to a report yesterday from China’s official Xinhua news agency. The world’s biggest energy user, China abstained from the United Nations Security Council resolution that declared the Crimean succession referendum illegal. Russia vetoed it.
China imported a record amount of Russian crude last month, 2.72 million metric tons, about a supertanker full every three days. The total more than tripled in a decade, and Russia now represents 12 percent of China’s crude imports, customs data show, among the highest levels in the past seven years.
“It’s always been assumed Russia reorienting its shipments toward China would be a long-term objective; originally it was considered something of a leverage point for Russia,” said Robert Kahn, a senior fellow at the Council on Foreign Relations in Washington. “Now people may see it as a reaction to the possible loss of a European market.”
As the world’s largest oil producer, Russia exported about $160 billion worth of crude, fuels and gas-based industrial feedstock to Europe and the U.S. in 2012, according to the International Trade Centre’s Trade Map, which is sponsored by the World Trade Organization and the United Nations.
European members of the Paris-based International Energy Agency imported 32 percent of their raw crude oil, fuels and gas-based chemical feedstock from Russia in 2012.
Europe will face higher gas prices if Russia successfully curtails pipeline supplies and diverts volumes to Asia, as more expensive shipments of the heating- and power-plant fuel arrive by tanker at European ports, said Peter Morici, an economist and professor at the University of Maryland. The U.S. will turn to the Middle East to replace any barrels it loses from Russia, he said.
The U.S. imported 167.5 million barrels of crude oil and petroleum products from Russia in 2013, 4.1 percent less than a year earlier and 25 percent lower than in 2010, according to the U.S. Energy Information Administration. The Organization of Petroleum Exporting Countries supplied 45 percent of the total 7.7 million barrels a day of crude oil imports last year, according to the data.
Russia faces its own challenges reducing its dependence on energy exports to Europe and the U.S., including a shortage of pipelines to Asia, Kahn said. In its pivot toward China, Russia is competing with energy suppliers from the Middle East and West Africa who also are targeting Asian buyers as the U.S. meets a rising portion of its oil and gas needs with North American production.
“The Asian buyers are in the driver’s seat,” Verleger said.
European Union foreign ministers meeting in Brussels agreed March 17 to freeze assets and put visa travel bans on 10 Russian politicians, three military leaders, including Black Sea Fleet Commander Aleksandr Vitko, and eight Crimean politicians. The sanctions are the broadest used on Russia since the 1991 fall of the Soviet Union.
Chinese President Xi visited Moscow on his first state tour in March last year, gaining a share of Russia’s prized Arctic exploration licenses. Russia also agreed to double oil sales and build a pipeline to export natural gas to China and draw a $2 billion loan from the nation’s lenders.
“China has invested in Russian oil companies and advanced loans to build infrastructure, and that’s a big statement,” said Nicholas Redman, London-based senior fellow for geopolitical risk and economic security at the International Institute of Strategic Studies. “Decisions have already been taken in Russia that far too much infrastructure has already been locked into European markets and it is highly desirable to diversify.”
The U.S. has already imposed a visa ban on some individuals, whom it hasn’t identified, and President Obama has authorized the imposition of financial sanctions against Russia. The U.S. expanded sanctions March 20 to include businessmen linked to Putin, such as billionaires Gennady Timchenko and Arkady Rotenberg.
The diplomatic standoff is fueling a push in Congress to remove restrictions on exporting U.S. oil and gas to put further pressure on Putin. Three congressional committees are holding hearings this week on whether the U.S. should sell more of its growing oil and gas resources overseas, in part to weaken European dependence on Russian oil and gas.
In November, the U.S. and the EU used sanctions against Iran to force it into negotiations over the Islamic republic’s nuclear program. While almost all U.S. trade with Iran was banned after the Islamic Revolution, the West started imposing stricter penalties on energy, ports, insurance, shipping, banking and other transactions in 2010.
U.S. restrictions also apply to other countries that trade with Iran. Limited relief was granted after Iran signed a temporary accord in November, though core oil and banking restrictions were maintained.
China National Petroleum Corp. last year paid the first $20 billion advance of an estimated $70 billion prepayment to OAO Rosneft. The payment was part of a $270 billion, 25-year oil supply agreement, which would make China Russia’s biggest market for its oil. In October, Rosneft also agreed to an $85 billion, 10-year deal with China Petrochemical Corp.
Under agreements signed in March 2013, China may double oil imports from Rosneft to more than 620,000 barrels a day, challenging Germany as the biggest buyer of Russian crude. In return, Rosneft allowed CNPC to join it in exploring three offshore Arctic areas for oil, the first such deal Russia has signed with an Asian company. The ocean north of Russia is considered one of the world’s largest unexplored oil provinces.
“Everyone knows there is a strong economic connection in place between China and Russia,” said Raj Kothari, a London-based fixed-income trader dealing in emerging market assets at Sun Global Investment Ltd. “That’ll play out over the years.”
Chinese energy companies have scoured the world for access to reserves and supplies to meet growing demand at home. Companies have announced more than $130 billion of acquisitions overseas in the past five years, according to data compiled by Bloomberg. State-run banks have given loans to nations including Venezuela and some in Africa for oil supplies.
“For Russia, there was an idea that Europe was something close by and it worked and it was desirable to emulate,” Redman said. “Over the years, on multiple fronts the attractions of the European model fell. It’s almost a civilizational choice the Russians have made to turn away from Europe, to stress their Eurasian rather than their European identity.”
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