How global geopolitical forces play in a Chinese private firm’s favour in the purchase of key Russian jewel energy asset

Some analysts believe the 14 per cent stake in the world’s largest listed oil firm by output was a result of political consideration on Beijing’s part

PUBLISHED : Tuesday, 03 October, 2017, 8:30am
UPDATED : Tuesday, 03 October, 2017, 10:57pm

The US$9.1 billion acquisition last month by a Chinese private company of a 14.16 per cent stake in Russia’s state backed Rosneft, the world’s largest listed oil firm by output, was the result of careful geopolitical calculations, according to analysts.

While it is hardly a surprise that the stake went into Chinese hands given the increasingly close strategic relationship between China and Russia, what was intriguing was how the stake ended up being bought by privately owned CEFC China Energy instead of oil and gas titan China National Petroleum Corp, the state owned parent of listed PetroChina.

Some analysts believe it was a result of political consideration on Beijing’s part.

“National oil companies had genuine concerns about getting closely involved with a company subject to United States’ sanctions, which could have backfired on them,” said Stephen O’Sullivan, chief executive of TS Lombard Research Partners who also leads emerging market energy research at the investment research firm.

“CEFC has plausible deniability of having anything to do with the Chinese government ... it is therefore a much safer company to make the investment than the major Chinese oil companies.”

CEFC’s spokesman said its Rosneft stake purchase is a “normal commercial investment based on its overall development strategy as well as the expected synergies from cooperation with Rosneft”.

CNPC’s spokesmen did not respond to a request for comment.

Russian officials, businessmen and some companies including Rosneft, have been subjected to sanctions by the United States and the European Union over Russia’s annexation of Crimea from Ukraine in 2014.

CEFC has plausible, deniability of having anything to do with the Chinese government ... it is therefore a much safer company to make the investment than the major Chinese oil companies
CNPC’s spokesman

The US government approved a package of new sanctions on Russia, part of which specifically targets its energy sector, after legislators voted overwhelmingly in favour of them amid investigation into alleged interference by Moscow in last year’s US election.

Just over a year ago, the state-owned oil giants of China and India, CNPC and Oil and Natural Gas Corporation (ONGC), were seen as front-runners to buy the Rosneft stake, a rare opportunity given Rosneft is Russia’s crown jewel that produces 40 per cent of its oil.

CNPC president Wang Yilin had said in a television interview during a visit in Moscow in May last year that it was interested to participate in the Russian government’s offer to sell 19.5 per cent of Rosneft.

CNPC is already a minority shareholder, having bought a small stake in Rosneft when the latter went public in 2006.

CNPC also inked an early July pact with Rosneft to cooperate on upstream oil and gas projects in Russia and other nations and to push forward a plan to build an oil refinery in Tianjin.

Asked if a joint bid by Indian state oil firm ONGC with CNPC for the Rosneft stake was possible, Indian Oil Minister Dharmendra Pradhan told Indian media in June last year that more joint investments between the pair “would be nice”.

But the Rosneft stake was bought last December by international commodities trading and logistics firm Glencore and its largest shareholder Qatar Investment Authority.

Most the purchase was financed by bank loans.

Nine months later, CEFC struck a deal to take over the portion of the 19.5 per cent stake that was bought by the pair and was financed by loans.

Glencore and Qatar will retain their respective stakes that they have already paid for with their own funds.

Switzerland-based Glencore, the world’s second largest independent crude oil trader, also retained a lucrative five-year 220,000 barrel-a-day crude oil supply agreement with Rosneft.

Political considerations aside, Maxim Petrov, senior corporate research analyst at energy and commodities consultancy at Wood Mackenzie, said CEFC’s bagging the Rosneft stake is a reflection of Beijing’s policy to support overseas acquisitions that would enhance China’s energy security, regardless they are state owned or privately owned.

CEFC, chaired by 40-year-old low profile Fujianese businessman Ye Jianming and owned by five other senior executives, is heavily reliant on policy bank money to finance its domestic operations and overseas acquisition spree.

Ye was ranked last year second place on Fortune magazine’s “40 Under 40” list of the world’s most influential young people.

CEFC spent at least US$1.7 billion since 2015 buying energy-related businesses in Romania, the United Arab Emirates, Russia, and Chad, and another US$1.2 billion buying financial services in the Czech Republic and the United States.

Policy lender China Development Bank provided 32.3 billion yuan or 87.5 per cent of CEFC’s principal subsidiary CEFC Shanghai International Group, according to a September 2016 bond prospectus.

CDB is also a major lender to finance CEFC’s Rosneft stake purchase, which has received preliminary approval from industry regulator National Development and Reform Commission a week after the deal was announced according to a Reuters report.

The sale was part of the Kremlin’s planned privatisation that would raise funds needed to plug a widening federal budget deficit amid depressed oil prices and tax revenues, as well as western sanctions that choked off the supply of fresh funding and oil industry technology.

“There has been greater appreciation of the complementarity of economic interests with China since Ukraine crisis,” said Daragh McDowell, principal analyst at global risk consultancy Verisk Maplecroft.

“There has been more willingness to allow China to not just be a trading partner but a country with which Russia can develop greater economic interdependency.”

For Rosneft, there is an additional benefit for a partnership with a Chinese firm that is not already a close business partner of state backed rival Gazprom.

Early this month, a few days before CEFC agreed to buy the Rosneft stake, the two firms inked a “strategic cooperation” agreement on potential joint oil and gas exploration and production in Siberia, besides “joint activity” in oil refining, petrochemicals production and trading.

CNPC has inked in 2014 with Gazprom a 30-year gas export deal worth US$400 billion. Siberia gas is expected to flow to northeast China in 2019.

Christian Boermel, senior analyst at Wood Mackenzie for Russia upstream oil and gas, said having a substantial Chinese shareholder may give Rosneft more clout in its struggle to end Gazprom’s pipeline gas export monopoly.

He noted that Rosneft has many oilfields in East Siberia with huge volumes of natural gas in associated deposits, which has no local market and export channel given Gazprom’s stranglehold in gas export.

But that may change as Rosneft has stepped up its cooperations with Chinese energy firms.

Rosneft June last year sold a 20 per cent stake in a subsidiary that operates one of East Siberia’s largest producing fields to a gas distribution unit of state-owned conglomerate Beijing Enterprises for US$1.1 billion.

Rosneft said the transaction would allow it to “fully implement” steps to exploit the potential of the field, including gas production, and potentially see it enter China’s vast gas market via gas supply swap deals.

Early this month, a few days before CEFC agreed to buy the Rosneft stake, the two firms inked a “strategic cooperation” agreement on potential joint oil and gas exploration and production in Siberia, besides “joint activity” in oil refining, petrochemicals production and trading.

In addition, the pair signed a contract to increase “direct supplies” of Russian crude oil to China. No details have been released.

Meanwhile, it remains to be seen whether CEFC’s stake purchase in US-sanctioned Rosneft will affect its US$100 million acquisition of a 19.9 per cent stake in New York boutique investment bank Cowen, struck in March this year and still pending US approval.

Cowen said on September 15 it and CEFC have withdrawn and re-filed a joint voluntary notice to the Committee on Foreign Investment in the United States “to permit more time for review” of the deal.

The two firms are hoping the deal will be cleared by the regulator by the end of the year. Its approval is one of the conditions for the deal’s completion.