- Only a small proportion of framework deals lead to contracts
- Russia seeks to tap China's energy market amid sanctions
Vladimir Putin’s long-heralded visit to Beijing this week yielded five framework energy deals that bolster Russian hopes of strengthening ties with China as relations sour with the U.S. and Europe. Yet if history is any guide, most of the accords won’t bear fruit.
“Heads of agreements are multiplying at a furious pace,” Sergei Tsyplakov, head of the Sberbank OJSC’s office in China, said by e-mail before the signing ceremonies in Beijing. “Practice shows that out of 10 agreements, we get one or at most two contracts.”
While Russia signed a $400 billion gas-supply contract with China in May 2014, after almost a decade of talks, and a $270 billion oil deal in 2013, the agreements initialed this week in Beijing by OAO Rosneft, Gazprom PJSC and Novatek OJSC are largely non-binding.
Putin is turning to China, the largest energy importer, as U.S. and European Union sanctions over the conflict in Ukraine limit the access of Russian oil companies to foreign financial markets and drilling technologies. While Russia’s need for credit and new markets increases as the country enters its first recession since 2009, Beijing is stalling on further deals as it grapples with industrial overcapacity, the fallout from a downturn in property investment and a volatile stock market.
Most of the framework deals reached in Beijing are “concrete,” Russia’s energy minister Alexander Novak told Bloomberg on the sidelines of a forum in Vladivostok. “Contracts require close scrutiny and this takes time.”
Gazprom, the world’s biggest gas exporter, said on Thursday that it has delayed to 2016 the deadline for signing a contract to supply China from fields in West Siberia. That deal, valued at about $170 billion at current prices by UBS Group AG analyst Maxim Moshkov, would have made China Gazprom’s largest customer, building on the landmark agreement brokered by Putin 16 months ago.
Gazprom instead signed a memorandum of understanding with China about a possible third gas pipeline from the Sakhalin region in Russia’s Far East, a smaller project, Chief Executive Officer Alexey Miller said in Beijing.
Framework agreements have a tendency to languish. It’s been almost a year since Rosneft signed an accord with China National Petroleum Corp. on the joint development of the Vankor, the largest greenfield oil development in post-Soviet Russia. While the Chinese talks continue, ONGC Videsh Ltd., the overseas arm of India’s biggest explorer, signed an agreement on Friday at the Vladivostok forum to buy 15 percent of the giant field from Rosneft.
China has also dawdled over the framework accord on joint cooperation at the East Siberian Taas-Yuryah project signed by CNPC and Rosneft in October 2013. Almost two years later, Rosneft sold a 20 percent stake to BP Plc and agreed to sell 29 percent to Skyland Petroleum, an independent oil company supported by private Chinese investors, after CNPC failed to exercise its right to buy 49 percent.
"People are being careful,” Natural Resources Minister Sergei Donskoi told Bloomberg at the Vladivostok forum when asked why binding deals between Russian and Chinese companies are taking so long to reach.
With Russian oil companies set to cut spending by as much as 15 percent in 2015, there appears to be no lack of enthusiasm from the Kremlin. When Putin invited CNPC to join the Vankor project in September 2014, he said “we are generally very careful about giving access to our foreign partners, but of course there are no limitations for our Chinese friends.”
Despite its inaction, China is still making positive noises. Sinopec Chairman Wang Yupu said last week his company is seeking to acquire “high-quality” foreign assets.
Sinopec and Rosneft agreed in Beijing on the potential joint development of two fields in East Siberia. If the companies proceed, the Chinese company will get the right to buy as much as 49 percent of the projects.
Novatek OJSC, Russia’s second-biggest gas producer, also agreed to sell 9.9 percent of the Yamal liquefied natural gas project to China’s state-owned Silk Road Fund. Should the deal be ratified, it would increase China’s shareholding in what is Russia’s first private LNG project to just under a third as CNPC already owns 20 percent.
Russia’s proximity to China gives it an edge in energy deals as it “ensures security” of oil and gas supplies, CNPC CEO Wang Yilin told reporters on the sidelines of the Vladivostok forum via an interpreter.
“The former USSR, being virtually next door, will have an advantage,” said Lin Boqiang, director at the Energy Economics Research Center at Xiamen University and an independent director on the board of PetroChina.