Russia Extends Oil, Gas Reach in Asia Post-Ukraine Crisis

Russia Extends Oil, Gas Reach in Asia Post-Ukraine Crisis
Shunned by the West and hurt by economic sanctions, energy resource-rich Russia looks east to Asia for markets, investments and partners.

Strained ties with the European Union (EU) and the United States arising from the crisis in Ukraine in 2014, have prompted Russia – one of the world’s largest oil and gas producers –  to turn its attention to Asia as it scoured for market opportunities amid Western sanctions.

Major Russian oil and gas firms OAO Rosneft and OAO Gazprom have strived to boost their business relations with countries in Asia, both at the company and governmental level. They are searching for new markets for their crude oil and natural gas, while encouraging Asian investments in their upstream assets.

“Asia is an important market for Russia, not only due to the sheer size of the expected growth in the region’s energy consumption over the coming years, but also because it allows Russia to diversify away from overly relying on the European market,” Peter Lee, Asia Oil & Gas Analyst at BMI Research, told Rigzone.

The Russian firms are looking beyond traditional markets like China and India as they seek to enhance co-operation with other Asian countries, including Vietnam, Thailand, Indonesia and Singapore.

Jason Waldie
Jason Waldie, Associate Director, Douglas-Westwood
Associate Director, Douglas-Westwood

Russia needs outlets for its crude production as the country attempts to maximize output to compensate for the steep decline in oil prices. The move is necessary due to the high breakeven costs of its petroleum projects, Jason Waldie, associate director at energy research group Douglas-Westwood, told Rigzone.

China Seen as a Key Partner

Rising energy demand in neighboring China has already offered Russia a huge market for its oil and gas sales.

“China's importance to Russia is growing. Its Russia's second largest crude oil market [after the Netherlands], and absorbs about 15.5 percent of Russia’s crude exports annually. This could increase further in the coming years though – for instance, the completion of CNPC’s Mohe-Daqing oil pipeline sometime by 2017 will make it easier for refiners in eastern China to procure Russian crude,” Lee said.

He added that Russia’s current gas exports to China is negligible, though this could change with a long-term liquefied natural gas (LNG) deal from Yamal LNG project which is set to commence first gas in 2018.

Russian gas sales are also set for tremendous growth after Gazprom and China National Petroleum Corp. (CPNC) signed major supply agreements. Gazprom agreed in 2014 to supply CNPC with 1.34 trillion cubic feet (Tcf) or 38 billion cubic meter (Bcm) of gas annually via the Power of Siberia pipeline for 30 years, tentatively planned for 2019 or 2020. Last year, the Russian firm agreed to sell a similar quantity of gas from its Western Siberian field to CNPC via the Power of Siberia 2 pipeline. 

The relationship was further strengthened when both signed a memorandum of understanding (MOU) to cooperate on building underground gas storage and gas-fired power generation facilities in China, with Russia seemingly keen to deepen its role in the Chinese market beyond providing energy supplies.

“The Russian-Chinese dialogue in the gas sector is crossing into new territory. Our cooperation in the field of underground gas storage and power generation will help deepen the relationship between the companies and considerably improve the environmental situation in China,” Alexey Miller, chairman of the Gazprom Management Committee, said in the June 25 press release.

Growing Importance of India

Like China, India’s importance to the Russian petroleum industry is growing. The South Asian nation is the world’s third largest oil country, consuming 4.195 million barrels a day of oil in 2015, according to BP Statistical Review of World Energy 2016.

“India is an attractive market for Russia to want to move into, given the sheer size of its consumer market and due to the fact that it offers one of the best long-term growth prospects in terms of oil and products consumption,” Lee explained.

“The latter is especially important within a global oil market that is becoming increasingly characterized by slower demand growth in developed nations, and accelerating shift to cleaner-energy sources [bearish for oil demand].”

Recent developments in bilateral energy relations point to increased Russia-India cooperation. In May, Rosneft completed the sale of a 15 percent stake in its subsidiary Vankorneft JSC to ONGC Videsh Ltd. for $1.27 billion. Vankorneft is the operator of the Vanker oil and gas condensate field – the largest that Russia has brought into production in the last 25 years – in the north of Eastern Siberia, Russia.

Indian participation in Vankorneft was further boosted in June, when a consortium of Oil India Ltd., Indian Oil Corp. Ltd. and Bharat PetroResources acquired a 23.9 percent stake. And if Rosneft and ONG Videsh follow through on a MOU signed in March for the latter to purchase another 11 percent stake in Vankorneft, India’s involvement in the project will rise to 49.9 percent.

“The potential organization of joint trade operations [arising from the Vankor cluster] will solidify the positions of Russian energy resources in a highly competitive environment of the Asia Pacific,” Rosneft said June 17 in a press release.

Greater India-Russia collaboration may lies ahead. Gazprom’s Miller met Indian Minister of Petroleum and Natural Gas Dharmendra Pradhan June 16 in St. Petersburg to discuss avenues for further collaboration in the hydrocarbon sector, including LNG supplies by Gazprom as well as upstream, scientific and technical cooperation.

Russia’s interest in entrenching its presence in India also extend to the downstream sector, with Rosneft reiterating in mid-June a plan to acquire a 49 percent stake in Essar Oil Ltd.’s 405,000 barrel-a-day Vadinar refinery in Gujarat.

When completed, BMI Research said in a June 17 report that the refinery deal would help Rosneft “gain a foothold in India’s fast-growing consumer market and pave the way for more Russian crudes to flow into the South Asian country.”

Waldie commented that the refining investment is “a signal to India that Russia is in for the long term.”

Smaller Countries in Asia Matter, Too

Russia energy firms have intensified their interactions with an economically vibrant Southeast Asia. Top executives of Rosneft and Gazprom met in recent months with their counterparts and senior government leaders from the region to enhance business cooperation across the entire petroleum value chain.

Energy-deficient Asia generally welcomed the prospect of increased availability of Russian hydrocarbon supplies in the region as well as potential participation in downstream investments in the region.

“Greater Russian crudes would help to keep prices in check, while also providing a potential counterweight to excessive dependence on the Middle East. Influx of Russian could even help to move forward stunted projects, like it looks set to do in the Chinese and Indonesian downstream markets,” Lee elaborated.

In Vietnam, Gazprom’s Alexey Miller met Nguyen Quoc Khanh, chairman of Vietnam Oil and Gas Group (PetroVietnam), in April to review their joint upstream exploration and development work in the country – through their joint operating company Vietgazprom – and in Russia at the Nagumanovskoye and Severo-Purovskoye fields.

Rosneft and PetroVietnam, partners in a gas project in Vietnam’s offshore Block 06.1, inked an agreement May 16 to expand cooperation in Russia, Vietnam and third countries for exploration and production, processing, commerce and logistics, as well as staff training.

“Cooperation will enable the Company to get a new channel of marketing hydrocarbons in the Asia-Pacific market and create additional synergies due to refining in the region,” Igor Sechin, chairman of Rosneft’s Management Board said in a statement.

Over in Indonesia, Rosneft and state-owned PT Pertamina penned an agreement May 26 to undertake a feasibility study on financing a project to construct a new refining and petrochemical complex Tuban in east Java as well as establish a joint venture for project implementation. A final investment decision will hinge on the results of the feasibility study, basic engineering design and front-end engineering design (FEED).

The deal by both firms also envisages a study into the prospects for joint projects in crude and oil products supplies, logistics and infrastructure, the potential for Pertamina to participate in Rosneft's upstream projects in Russia as an equity holder, and partnership in international joint projects for oil refining.

Meanwhile, Thailand’s state-owned PTT Public Co. Ltd. signed a MOU with Gazprom on May 18 for oil and gas cooperation. The potential areas for collaboration include hydrocarbon development, joint LNG projects, LNG and liquefied petroleum gas trading.

Russia Eyes Asian Oilfield Services Expertise

Russian energy companies’ interest in Asia is not confined to only markets and investment opportunities, but also extend to cooperation with regional oilfield services contractors.

Rosneft and China’s Shandong Kerui Petroleum Equipment (SKPE) signed June 25 a MOU on strategic cooperation in oilfield services, under which both would work on a pilot project in Russia. Rosneft Chairman Sechin indicated that SKPE has high-tech equipment and software for the most popular works in oil and gas production and believed that cooperation with the Chinese partner will allow it to further improve the performance of producing assets.

In May, Rosneft entered into an agreement to partner Singapore’s rig builder Keppel Offshore & Marine Ltd. (Keppel O&M) and Norway’s drilling equipment firm MH Wirth in a joint venture (JV) to create a design and engineering center (DEC) for offshore drilling rigs. Still, Keppel said the JV and DEC will adhere to the prevailing U.S. and EU sanctions imposed on the Russian offshore oil and gas sector.

Commenting on Rosneft’s tie-up with Asian services providers, BMI Research analyst Lee said it makes “sense because this is the area that Russia is lacking in. Russia doesn’t have the domestic rig building know-how or the capability, and they can't tap European/U.S. rigs due to sanctions, and therefore, the overtures to Asian partners.”

Waldie said that, “Keppel O&M can open a new market and [the rigs could be] high end, especially if the Norwegians [MH Wirth] are involved.”



WHAT DO YOU THINK?


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Kenny  |  August 05, 2016
Be very careful that hand that feeds, or supplies on your behalf. I realize, as do many, the ramifications. I only hope those receiving product understand the implications and liabilities. Path of least resistance and receptive market do not a cohesive partnership make....


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