Russia Hastens China Energy Pivot With Oil, LNG Supply Deals

Russia signed deals to supply China with crude oil and liquefied natural gas, deepening the embrace between the world’s largest energy producer and the fastest-growing major economy.

OAO Rosneft agreed on long-term contracts to supply more than 2.6 billion barrels of crude oil to China National Petroleum Corp. over the next 25 years. The Beijing-based company also agreed to buy a 20 percent stake in OAO Novatek’s Yamal liquefied natural gas project, the first time a Chinese company will participate in a Russian gas-export project.

President Vladimir Putin is encouraging energy producers to make deals with China, responsible for 77 percent of the growth in global energy demand last year, as consumption of oil and gas falls in traditional European markets. The development of fields in Russia’s Far East that are nearer to Asia than Europe is hastening the shift.

“Putin himself has high hopes for Asia, and with these deals Russia is signaling that it is ready to deliver,” said Andrey Kryuchenkov, an analyst at VTB Capital in London. “China is going to be guzzling energy for a long time, and Russia’s in a great position to supply its needs.”

The deal between Novatek, Russia’s second-largest gas producer, and CNPC shows Russia’s willingness to end OAO Gazprom’s monopoly on gas exports in a quest to open markets in Asia. Gazprom has been negotiating to export gas to China for more than a decade without reaching an agreement.

Yamal Project

The $20 billion Yamal LNG project, where France’s Total SA is also a partner, will liquefy gas from fields above the Arctic circle for shipment around the world. Novatek, controlled by billionaire’s Leonid Mikhelson and Gennady Timchenko, expects the first cargoes in 2016. CNPC will buy 3 million tons of LNG a year under today’s agreement.

“For Novatek, the deal means they have arguments to convince the government that they can sell the gas to a new market, thereby moving up export liberalization,” said Ildar Davletshin, an analyst at Renaissance Capital Ltd. in Moscow.

China’s rising energy needs are driving world demand growth. It shares a border with Russia, which holds the world’s second-largest gas reserves after Iran, according to BP Plc’s statistical review published June 12.

Demand in China will grow by 12 percent a year over the next five years as it absorbs one-third of new LNG supplies worldwide over that period, the International Energy Agency said yesterday in its Medium-Term Market Report.

Supply Deals

Today’s agreements were signed at the St. Petersburg Economic Forum where Putin and Russian business leaders including Rosneft Chief Executive Officer Igor Sechin are courting investment and trade deals. Rosneft, the world’s largest publicly traded crude oil producer also reached accords today with China Development Bank, Exxon Mobil Corp. Italy’s Eni SpA, Norway’s Statoil ASA, and General Electric Co.

Rosneft also plans to develop LNG for the Asian market, signing non-binding supply deals with Japan’s Marubeni Corp., Sakhalin Oil & Gas Development Co. and Vitol Group from a planned plant to be built with Exxon Mobil by 2018.

“In our long-term development, we are making a serious bet on the gas business,” Sechin said today. Rosneft is seeking to double gas output by 2020 to 100 billion cubic meters a year.

Rosneft’s deal with CNPC is for 365 million tons of crude shipped over 25 years, valued at $270 billion at today’s market prices, Sechin said in St. Petersburg today. The Asian country will become the biggest market for Russia’s crude oil.

TNK=BP Acquisition

The deal includes a $70 billion prepayment, according to Putin. That is more than Rosneft’s net debt, which surged to 1.78 trillion rubles ($54 billion) at the end of March, following the $55 billion acquisition of Russia’s third-largest crude producer TNK-BP.

“It secures a good market for Rosneft and helps the balance sheet,” said Bob Dudley, chief executive officer of BP, which became a 18.5 percent shareholder in Rosneft this year after the sale of TNK-BP. “It also secures a long-term crude supply to a country where energy demand is growing very rapidly.”

China’s demand for crude oil to more than 10 million barrels a day in 2012, or 12 percent of global consumption, according to statistics compiled by BP. Europe’s demand dropped 2.5 percent last year. Likewise, gas demand jumped 9.9 percent in China and dropped 2.3 percent in Europe.