ROSNEFT SEEKS STRONGER CHINESE CONNECTION

Russia’s state-run oil company Rosneft pledged to move ahead with its plans to invest in China. The company conceded, however, that it had struggled to reach an agreement with the Chinese on the crude export price.

Rosneft pledged to finalize a feasibility study of its planned refinery in China by the end of this summer, Rosneft CEO Sergei Bogdanchikov announced earlier this month. “We are exploring opportunities to refine oil in China,” he said, adding that Rosneft was interested in a profit margin of no less than 20 percent (Interfax, July 1).

In October 2007 Rosneft and China National Petroleum Corporation (CNPC) formed a China-registered joint venture, Russo-Chinese Eastern Petrochemical Company, to build a new 10-million-ton per year refinery in Tianjin, China, by 2011 at an estimated cost of $3 to $4 billion. The joint venture also plans to build about 300 gas stations in China, but the Eastern Petrochemical Company has been slow to make any practical moves toward realization of its ambitious goals.

Rosneft appears to face other problems in its investment cooperation with the CNPC. In 2006 Rosneft and CNPC created another joint venture company, Vostok Energy, of which Rosneft owns 51 percent and the CNPC 49 percent. In July 2007 Russian-registered Vostok Energy won an auction and secured a license to develop the Western-Chonsk deposit in Irkutsk region with estimated reserves of 30 million tons of oil and 15 billion cubic meters of gas. Vostok Energy, however, appears slow to develop its deposits.

The Russian oil giant also indicated plans eventually to sell its crude to China at higher prices. Bogdanchikov said that Rosneft was considering negotiating new prices for its exports to China. “There is a contract; it is being implemented and will be implemented till 2010,” he said. Bogdanchikov stated that subsequent price reviews of oil export prices could not be ruled out, and negotiations on prices were ongoing (Interfax, July 1).

The CNPC is understood to be reluctant to raise the import price of crude oil supplied to China by Rosneft. According to a 2004 contract, the CNPC made an advance payment of $6 billion to Rosneft for future supplies of 48.4 million tons of oil till 2010 at a $3 per barrel discount from the Brent price. Rosneft used the funds to acquire the assets of former oil giant Yukos.

In 2007 Rosneft became unhappy over the low contract oil price. The CNPC agreed to raise the price by only $0.675 per barrel, thus cutting the discount down to $2.325/barrel. Since then, the Chinese negotiators have been reluctant to cut the discount any further.

Subsequently, Russian oil exports to China decreased. In 2007 oil deliveries to China, mainly by Rosneft, totaled 14.5 millions tons or down 9 percent in terms of volume from the previous year.

Russian oil executives also indicated that Rosneft used the issue of the ESPO offshoot in its negotiations with the CNPC on the crude export price. Earlier this month, Transneft head Nikolai Tokarev announced that the Chinese had financed a feasibility study of the ESPO’s offshoot to China, and Transneft was prepared to finalize the study in July. He also said that the project remained dependent on suppliers and negotiations, notably with Rosneft: “Unless an agreement is reached,” there would be no point in building the branch line, Tokarev said, adding that under such a scenario Transneft had no obligations to refund the Chinese feasibility study payment (RIA-Novosti, July 1).

At the same time, Bogdanchikov also confirmed that the company was still considering a feasibility study to build another refinery in Russia’s Far East near the end-point of the ESPO (Interfax, July 1). Bogdanchikov’s statement appeared to contradict skeptical statements by other Rosneft executives.

In June Russia’s state-run oil company apparently pressed the government to support its Far Eastern expansion with tax privileges. Rosneft might cancel plans for the Far Eastern refinery in Nakhodka due to unfavorable taxes, Rosneft first deputy CEO Sergei Kudryashov indicated. The company had submitted its tax relief suggestions to the government, he said (RBK Daily, June 25). The cabinet has been hesitant, however, about granting Rosneft any significant tax breaks.

Rosneft’s moves to expand energy cooperation with China are part of its ambitious expansion plans. The company pledged to pump 160 million tons of crude oil in 2015 and 170 million tons in 2020, or up from 100 million tons last year and an estimated 111 to 112 million tons this year, Bogdanchikov said earlier this month (Interfax, July 1).

In its drive to acquire and develop new deposits, Rosneft has been careful not to antagonize another Russian energy giant, Gazprom. In February Rosneft head Bogdanchikov suggested improving ties with Gazprom and cooperating in developing off-shore projects in the Far East.

Rosneft and Gazprom were also understood to be moving toward a division of Russia’s continental shelf. Kommersant business daily wrote that Rosneft claimed only 29 license areas, mainly in the Far East, or roughly 10 percent of the shelf’s estimated resources (Kommersant, July 4).

Rosneft has pledged to pump 40 to 50 million tons in Eastern Siberia by 2020 and promised to supply up to 25 million tons a year of crude for the ESPO from Vankor oilfield. It remains to be seen, however, whether Rosneft will be able to deliver on its investment and expansion pledges.