This article originally appeared at OilPrice.com
By now, the whole world knows that Russia has been trying to pivot towards China in the wake of the U.S. and EU sanctions that specifically targeted the Russian oil and gas industry.
On September 3, 2015, during a meeting of Russian President Putin and Chinese President Xi Jinping in Beijing, China’s CNPC and Russia’s Gazprom signed aMemorandum of Understanding for a third project that will be developed in the next five years. Although this seems to be a win- win situation for both nations, one has to consider the fact that there have been several delays in most of the previous China – Russia deals.
China and Russia finalized a gas deal in May 2014 which involved construction of two pipelines that would transport Russia’s gas to China. The first pipeline, originating in East Siberia was called the ‘Power of Siberia’ pipeline while the one originating in West Siberia was called the ‘Power of Siberia 2’ or ‘Altai’ pipeline. The equity firms in China suspended the ‘Power of Siberia 2’ project in July, leaving the Russians in jeopardy.
The ongoing Chinese economic slowdown and stock market crash would mean that Russia needs to be extremely wary China’s investment plans. Statistics fromInvestorIntel even revealed that Russia’s exports to China dipped by 20 percent when compared to last year. In fact, China invested just under $1.6 billion into Russia in 2014 while Russia invested a whopping $151.5 billion during the same year into the Chinese economy.
With the China story fizzling out, Russia is now planning to build up its presence in China’s neighbor India. With huge internal energy consumption and a bustling economy, India is set to grow faster than China in 2015 and 2016 according to therecent projections from the IMF. After China, India is the next best logical alternative for Russia to strengthen its Asian ties and move away from western sanctions.
Can Russia hedge its bets by starting to invest in India?
India’s oil imports from Russia were under 1 percent until the recent Annual India-Russia summit that was held in December 2014 in New Delhi. During the meeting of the Russian President Putin and the Indian Prime Minister Narendra Modi, both the countries signed several crucial bilateral agreements. The agreements had a bilateral program ‘on enhanced co-operation in oil and gas sphere,’ which included oil and gas exploration and production along with future LNG supplies and new projects.
The Russians have, in fact, already started their investments into India’s oil and gas sector. Russia’s Rosneft and India’s Essar Oil Limited signed a term sheet (non-binding) on July 8, 2015 with reference to a multi-million dollar deal between the two companies. The term sheet stated that the India-based Essar Group would be selling a 49 percent stake of its Essar Oil division to Rosneft for over $1.5 billion. “The financial terms of the deal are being discussed while both companies are exploring a part-crude and part-cash deal,” said a source close to the development.
Earlier, in December 2014, during the same day of the India-Russia Annual Summit, Rosneft clinched a deal to supply close to 10 million tons of crude oil annually to Essar Oil for a period of ten years. Russia’s decision to invest in India’s Essar Oil is a highly strategic one.
Located in the world’s ‘largest refining hub’- Jamnagar, Essar Oil runs an oil refinery capable of processing 20 million metric tons per year (MMTPA), the second largest refinery in India, and one of the largest in the world. This makes the deal particularly attractive for Rosneft as it would have stake in a major Indian refinery, which is strategically located near a jetty and which can be expanded further in the coming years without any substantial investments.
Also, India’s internal demand for oil is set to increase from 224 MT in 2014 to 310 MT by 2030 while its requirement of gas would more than double from 51 bcm in 2014 to 114 bcm in 2030. Essar Oil also has close to 1600 retail gas stationslocated all across India. Essar and Rosneft plan to more than triple the number of retail gas stations in the coming two years.
Apart from the Essar deal, Rosneft has also sold a 15 percent stake in Vankorneft (a subsidiary of Rosneft that was formed in 2004 for developing and maintaining a major Russian oil and gas field called Vankor) to India’s stated owned Oil and Natural Gas Corporation Limited (ONGC) for a reported $1.25 billion. While the deal with India has been sealed, Rosneft is still negotiating with China’s National Nuclear Corporation (CNPS) for a stake in Vankorneft. One can clearly see that Russia’s energy deals with India have been on schedule without any significant delays and hurdles, unlike the deals struck with China.
So what is Russia’s future energy strategy?
Back in 2007, Putin predicted that Russia would be exporting 35 percent of its total crude oil and 25 percent of its total gas supply to China by the year 2025. Putin even expected that China would become a major trading partner of Russia and would surpass the EU by the year 2030. However, with the ongoing Chinese economic slowdown and other project delays, expectations may have been raised too high.
On the other hand, Russia is not giving up on Europe. Russia’s Gazprom recently announced an ‘Asset swap’ agreement with European players that included BASF, Royal Dutch Shell, E.ON and OMV. This move would enhance the Russian-EU partnership in coming years as it would increase Russia’s presence in Europe and, in return, allow the EU to acquire more Russian gas.
Still, Europe is not much of a growth market. And if China is not going to live up to its billing, then Russia will probably look to expand its relationship with India. China has been responsible for a large portion of global growth over the past decade, but the future may belong to India. That is why Russia wants to get in on the market early.