Commodities

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

Vladimir Putin is said to be looking to sell almost a fifth of Russian state oil champion Rosneft and wants China and India to team up to buy it. Narendra Modi should negotiate for a bigger share.

The attractions for Putin of splitting a stake between the world's No. 2 and No. 3 oil importers are obvious. Russia has been fighting Saudi Arabia for market share in China for years, and often bests the world's biggest producer in terms of import volumes into the People's Republic. With the globe awash in oil and an initial public offering of Saudi Aramco in the works, equity in oil companies might be a more valuable resource in cementing trade relationships than the black gold itself.

The Russians Are Coming
China's oil imports from key countries, three-month moving averages
Source: China Customs General Administration, Bloomberg

Still, China's oil consumption appears to be slowing, with apparent demand plateauing and even declining since August last year. While Chinese companies have been lavish with their overseas investments of late, there's no particular need to buy a chunk of Rosneft to secure a new source of energy supply. Indeed, of China's big three oil exploration and production companies, refinery-heavy Sinopec is cutting production and PetroChina is growing it in the low single-digits. Only Cnooc is making a serious attempt to raise output.

Full Tank
Trailing 12-month average Chinese apparent oil demand has been flatlining for almost a year
Source: National Bureau of Statistics of China, Bloomberg
Note: January figures not included in the average because China's statistics bureau does not typically report the numbers. February figures weren't available in 2016 and 2014.

India is a different beast, with a shortage of crude that's only going to get more acute as incomes rise and automobile ownership grows.

Its state-run explorer Oil & Natural Gas Corp. is getting ready for a $5 billion spending spree to boost production off the country's east coast and has assets in Sudan, Colombia, Venezuela, Brazil, Vietnam, Syria and Russia. With a geological shortage of exploitable oil, it's ultimately those overseas fields that will end up plugging India's output gap.

New Delhi has long looked to its Cold War ally for a solution to its energy handicap. About 32 percent of the 5.5 million metric tons of oil production from ONGC's overseas arm ONGC Videsh last year came from its 20 percent stake in the Sakhalin-1 project in Russia, which the Indian company acquired from Rosneft in 2001. That's not enough to sate its appetite, though.

At the peak of the 2008 financial crisis, Videsh somehow found $2 billion to purchase Imperial Energy, a then U.K.-traded producer with fields in Siberia. Last month, it paid Rosneft $1.27 billion for a 15 percent stake in Vankor, one of the largest Russian oil fields to go into production in the last quarter century.

Taking a stake in Rosneft itself -- the whole 19.5 percent slice would go for about $11 billion, people familiar with the matter said -- seems a good idea in the context of that scramble for fuel.

If you look at an oil company as a claim on its underground reserves of crude, Rosneft is about the cheapest way to source supply right now among the giant 1 million-barrels-of-oil-a-day producers.

Dirty Tankers Going Dirt Cheap
The enterprise value of each barrel of oil in Rosneft's reserves is the lowest of major oil producers
Source: Bloomberg
Note: Shows barrel of oil equivalent figures.

Each barrel of Rosneft's developed reserves is worth about $4.16 of enterprise value, according to Bloomberg calculations -- well below ONGC's $7.16, not to mention figures north of $20 for the likes of Exxon Mobil, Total and Shell, and $46.62 for Cnooc.

ONGC isn't short of cash for acquisitions, either. Ebit over the most recent 12-month period was equivalent to almost 11 years' of interest payments, comfortable relative to a median 3.34 years for the 17 members of the 1 million-barrel-a-day club.

For producers with strong balance sheets, the ongoing weakness in oil markets is creating an attractive environment in which to pick up assets. If Rosneft is selling a 19.5 percent stake, ONGC should abandon its dormant alliance with PetroChina parent CNPC, elbow the Chinese aside, and ask for the lot.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. According to BP's latest Statistical Review.

To contact the authors of this story:
David Fickling in Sydney at dfickling@bloomberg.net
Andy Mukherjee in Singapore at amukherjee@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net