China and Russia are moving closer together in the oil and gas industry, with the acquisition by CEFC China Energy of a 14.16% stake in Russian oil giant Rosneft for US$9.1 billion.
The sellers are the QHG consortium, which comprises Anglo-Swiss commodity and mining multinational Glencore and the Qatar Investment Authority (QIA). The consortium only acquired their combined 19.5% stake in December last year. UK oil major BP holds a 19.75% stake in Rosneft. The Russian government holds a 51% controlling stake. The deal follows on from a strategic cooperation agreement signed by Rosneft and CEFC in July to explore the opportunity to work together on exploration, production, refining and trading.
Given Russia’s poor relationship with the United States, Russia has been steadily moving towards closer economic cooperation with China, with significant cooperation in the oil and gas industry. Russia is now the biggest supplier of crude oil to China, having overtaken Saudi Arabia – though the Saudis are also embarking on a major push for closer trade and investment links with China. In the M&A space, late last year, Rosneft agreed to sell a 20% stake in its subsidiary Verkhnechyonskneftegaz to Beijing Gas. That deal was valued at US$1.1 billion and was completed in June. It will significantly improve Rosneft’s distribution capabilities in the Chinese market.
Chinese entities also hold a 30% stake in the Yamal LNG project in Siberia, which earlier this year agreed to a series of further loans from European banks amounting to approximately US$500 million. Further, Gazprom, Russia’s state-owned gas monopoly, is constructing a 4,000km gas pipeline to China which will further integrate the energy industries in the two countries. Rosneft has been lobbying to be allowed access to this pipeline.
For seller Glencore, the timing looked good. At the time of acquisition, President-elect Donald Trump was expected to improve relations with Vladimir Putin. But Trump has met fierce opposition from within Washington, and has even imposed a new round of sanctions on Russia. That makes it difficult for Glencore to develop its relationship with Rosneft, and it has instead sold out at a profit. It will however retain a small stake of 0.5%. QIA will remain a substantial shareholder with 4.7%.
The deal to acquire the equity stake was formally signed just after Russia hosted its Eastern Economic Forum in Vladivostok on September 6 and 7. In Vladivostok, President Vladimir Putin had a meeting with vice premier of the People’s Republic of China State Council, Wang Yang.
Participants in the Russia–China business dialogue, held on September 7 as part of the forum, discussed the prospects for further cooperation. Taking part in the discussion were vice premier Wang Yang, secretary general of China Overseas Development Association He Zhenwei, deputy prime minister of the Russian Federation Yury Trutnev, and minister for the development of the Russian Far East Alexander Galushka.
Wang Yang, heading up the Chinese delegation to the Eastern Economic Forum, pointed to the close ties between China and the Far Eastern Federal District. Investments are being made in such sectors as timber, agriculture, construction materials and the energy sector. And over the last few years, more and more Chinese companies have set up operations in the Russian Far East.
Alexander Galushka said that in order to increase the scope of trade, economic and investment cooperation, new intergovernmental mechanisms have been introduced. For example, a Far East support centre for Chinese investors has been set up under the auspices of Yury Trutnev and Wang Yang.
