Energy

Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

When it comes to oil, Russia likes to keep its friends close, its frenemies closer and, as for its customers, it invites them to just move in.

CEFC China Energy Co., a closely held energy and finance conglomerate, is buying a stake of 14.16 percent in Rosneft PJSC for roughly $9 billion. The stake represents the majority of the 19.5 percent stake in Russia's national oil champion that was bought from the state only last December by a consortium consisting of Glencore Plc and Qatar's sovereign wealth fund.

That Glencore and the Qataris are offloading a hefty chunk of their holding isn't a huge surprise. That original deal was a marriage of convenience. The Kremlin needed money. Glencore, meanwhile, wanted a multi-year supply agreement for Russian oil. Having served its purpose, Glencore retains that contract, and selling to the Chinese brings in enough to pay off the debt used in the original deal at a notional premium of 10 percent over what the consortium paid.

Rosneft, meanwhile, says it is glad the buyer was "specifically a Chinese corporation,” adding:

We hope that this partner will provide the possibility to gain synergies from cooperation.

Saudi Arabia, take note.

Strange things have happened since the oil crash began in late 2014. Russian oil production has proven remarkably resilient both to the oil crash and sanctions -- in part because of a slump in the ruble's value and some creative financing like that deal with Glencore. Meanwhile, Russia and Saudi Arabia have become noticeably cozy, jointly leading the current oil-supply cut agreement struck in Vienna.

They aren't really friends, though; more like frenemies. Low oil prices have provided some common ground.

But it is the reality of a more competitive market for barrels that has forced them together. And both know it cannot last indefinitely.

China is ground zero in the battle for market share. Growth in demand for oil in the industrialized world is effectively over; Asia is the 21st-century prize.

Here is where China has been getting its crude oil imports from in recent years:

Broader Horizons
China's demand for oil imports has continued to grow, but the source of those barrels has shifted noticeably
Source: Bloomberg Intelligence
Note: "LTM" refers to the last 12 months through July 2017.

China has diversified its supplies -- and Russia has benefited:

Bear Trade
Russia's share of Chinese oil imports began to rise after the oil crash began and has since overtaken Saudi Arabia
Source: Bloomberg Intelligence
Note: Rolling 12-month averages.

Rosneft has struck deals all over the place. BP Plc took a stake of about a fifth in 2012, as partial payment for its share of TNK-BP, a deal that consolidated domestic reserves and production under Russian control. It also agreed to a far-reaching joint venture with Exxon Mobil Corp., designed to bring in capital and expertise to develop Russia's offshore Arctic reserves and shale assets. Sanctions have mostly stymied that one. Still, Rosneft has also found time (and money) to prop up Venezuela's struggling national oil company with advance payments for oil.

And, just prior to Friday's news, Rosneft signed a long-term supply and cooperation agreement with CEFC.

For the global oil market, Rosneft's maneuvering epitomizes the sharper competition that comes with a slower growth. China, as buyer, holds more power than it once did.

Saudi Arabia has been making its own moves to strengthen its ties to China, investing in downstream assets there. Focused on the planned IPO of its own national oil company, though, it expends much effort in holding together the supply-cut coalition.

Meanwhile, nominal partner Russia is playing the long game (it has also made big strategic moves in that other growth market, India).

This is another reason why Riyadh ought to reconsider its current policy (but it probably won't).

Perhaps it even sees the potential to play Russia at its own game, offering a stake in a newly listed Saudi Arabian Oil Co., or Saudi Aramco, to a Chinese investor when the time comes. If that is being considered, though, then Riyadh may want to consider one important aspect of Rosneft's latest deal: price.

CEFC's implied price of about $6 a share equates to 5.5 times Rosneft's 2017 Ebitda. That is far below the multiples garnered by the likes of Exxon -- closer to 10 times -- which underpin hopes of a multi-trillion valuation for Aramco. If Saudi Arabia decides to invite China in, then it shouldn't expect its guest to pay a premium for the privilege.

Peter Grauer, the chairman of Bloomberg LP, is a senior independent non-executive director at Glencore.

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

To contact the author of this story:
Liam Denning in New York at ldenning1@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net