The Russo-Chinese Oil and Gas

Agreements Initiate a New Era in

Geopolitics of Oil
Publication Date: October 2009

The Russo-Chinese Oil and Gas Agreements Initiate a New Published Oct 2009
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The Russo-Chinese Oil and Gas Agreements Initiate a New Era in

Geopolitics of Oil
In October 2009, Russia and China signed multiple oil and gas agreements to strengthen their
collaboration in the energy sector. In 2009, they signed oil agreements worth $100 billion. Russia
agreed to supply oil to China for 20 years in lieu of a $25 billion loan to OAO Roseneft, a state run oil
company and OAO Transneft, a state run pipeline company. Gazprom, the Russian oil and gas giant,
aims to build two gas pipelines to deliver 80 billion cubic metres of gas annually to China. This will give
Gazprom an opportunity to penetrate into new markets beyond its traditional European markets.
China also plans to offer a $10 billion credit to the Shanghai Cooperation Organization (The group
comprises of Kazakhstan, Uzbekistan, Kyrgyzstan and Tajikistan, Russia and China). Further,
Chinese sovereign wealth fund will invest $300 million in Nobel Holdings Investments (a Russian oil
producing company).

With the global financial crisis affecting the Russian oil and gas sector, Chinese oil agreements have
revived optimism. To safeguard its economic growth, China has invested in major oil and gas
companies worldwide since December 2008, and Russia, with its huge oil and gas reserves, has been
an attractive investment destination for Chinese oil and gas companies. By becoming a major supplier
to China, Russia plans to reduce its risk of overdependence on oil and gas revenues from Europe.

Russian National Oil and Gas Companies Gain Access to China, Asia’s Largest Energy
Market
China is the second largest oil consumer in the world and the third largest oil importer after the United
States and Japan. The increasing energy consumption in China offers a growth opportunity for
Russian oil and gas giants.

For Russia, more than 60% of its export revenues come from the oil and gas sector. However,
recession and lower oil and gas demand has influenced profits of Russian national oil and gas
companies as well as its GDP. Russian gas exports have shrunk by 56% in the first quarter of this
year, compared to last year due to plunging gas demand in the European market.

Gazprom, the third most-valuable company in the world a year ago has seen its global position fall to
40, because of a decline in demand for oil and gas. The disputes over gas supply between Russia and
its neighboring country, Ukraine, has further affected oil revenues of Gazprom, and this has further
prompted West European nations to consider diversification from Russian gas supplies. Even after
recession, Russia and Gazprom, face a looming threat of shrinking European gas demand further
aggravated by frequent supply disruptions that have already dissatisfied European customers over the
last few years.

Despite declining gas demand, Gazprom has a greater advantage, post recession, since it controls
one quarter of the world’s gas reserves. However, Russian oil and gas giants have very rarely
penetrated into emerging Asia Pacific markets.

The marketed natural gas production in Asia Pacific has increased steeply in 2008 from 2007.
Developing markets like China, Vietnam, Thailand, Singapore, Indonesia, Malaysia, and Bangladesh
have witnessed strong activity in natural gas usage in the industrial, petrochemical and power sectors.
Similarly, natural gas usage in power sectors has also increased in the Middle East and Africa.
Russian gas companies, affected by recession, have potential growth opportunities in buoyant Asian

The Russo-Chinese Oil and Gas Agreements Initiate a New Published Oct 2009
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markets, where natural gas consumption is expected to rise post recession. This would help Russian
gas companies to reduce their dependence on European gas import revenues.

Figure 1: Global, Marketed Production of Natural Gas (Bcm), 2008

Asia Pacific
13.44%

North America
26.11%

Middle East
12.40%

Latin America
Africa
4.94%
6.60%

Europe
9.85%

FSU
26.67%

Source: CEDIGAZ/ GlobalData

Russian oil and gas majors need investments to increase their exploration activities and boost pipeline
development projects. Russian pipelined oil and gas will face tough competition from Nabucco project,
Uzbekistan’s oil partnership with South Korea, and China’s oil and gas deals with Kazakhstan and
Turkmenistan.

In July 2009, a €7.9 billion ($11.7 billion) Nabucco deal was signed to develop a pipeline carrying
natural gas from the Middle East and the Caspian region to central Europe. The pipeline deal aims at
reducing the region's reliance on Russian gas. This deal between Austria, Bulgaria, Hungary, Romania
and Turkey will impede the Russian gas pipeline projects to Europe.

In May 2009, the oil deal between Uzbekistan and South Korea was signed providing the state-run
Korea National Oil Corporation (KNOC) full exploration rights as the main contractor to the Namangan-
Tergachi and Chust-Pap blocks. In addition, South Korean companies are expected to develop the
Surgil gasfield near the Aral Sea.

In June 2009, China signed a 30 year deal to buy 40 billion cubic meters of natural gas annually from
Turkmenistan. The natural gas will be transported through a 7,000 kilometer gas pipeline, whose
construction is expected to be completed by the year end. Moreover, China will provide a loan of $4
billion to Turkmenistan’s state gas company, which will further strengthen the country’s oil and gas

The Russo-Chinese Oil and Gas Agreements Initiate a New Published Oct 2009
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sectors. China has also promised to fund $3 billion to develop vast South Yolotan natural gas field
close to the Afghan border. Another deal with China National Petroleum Corporation, China’s state-
owned oil and gas company, will help the company to withdraw 1.3 trillion cubic meter of gas from the
Bagtyyarlyk field near Turkmenistan's border with Uzbekistan.

Chinese companies have purchased stakes in a Kazakhstan oil and gas company and have signed a
series of oil and gas cooperation agreements. As a part of the” oil for loan” deal, China will lend $10
billion to Kazakhstan. The agreement also focuses on developing a 2,800 km pipeline with an annual
capacity of 20 million tonnes.

China’s deals and European partnerships with Central Asian and Eurasian countries are potential
threats to Russia’s pipelined gas market. The repeated gas supply disruptions to Europe mainly due to
price conflicts with Ukraine further weakens Russian prospects for the European gas market. China’s
commitment to develop pipelines through Central Asian region will further slash China’s demand for
Russian gas. Hence, Russian oil and gas companies need to accelerate their pipeline and exploration
development activities to strengthen their footholds in the Eurasian gas market. However, recession hit
Russian oil and gas companies are finding it difficult to boost the pace of development process due to
lack of cash reserves. China’s billion dollar intergovernmental agreements with Russia come at the
opportune time to rescue the Russian oil and gas giants from losing monopoly in the Asian and
European markets.

In August 2009, Russia and China signed multi-billion-dollar agreements to construct oil pipelines from
Russia to China. The total deal value is estimated in trillions of dollars and it is intended to pump
Russian oil to China over a 20 year period. Russian companies OAO Rosneft Oil Co. and Transneft
will gain $25 billion in the form of loans in lieu of oil. China plans to procure approximately 15 million
metric tonnes per year of crude oil from 2011 to 2030 through a 1,030-kilometer pipeline. The pipeline
is expected to be constructed from the Skovorodino refinery in Eastern Russia to Mohe County in
China’s Heilongjiang province. The pipeline is a branch of East Siberia-Pacific Ocean Pipeline (length
4,700 kilometers). Transneft, a Russian pipeline company plans to complete the first segment of this
pipeline, enabling Russia to supply fuel directly to China. In addition, Russia is negotiating with China
on contracts worth $100 billion for natural gas supplies. The fruition of these contracts would make
China, the largest natural gas customer for Gazprom. Russia also plans to build two gas pipelines
delivering 80 billion cubic meters of gas annually to China, and the quantity of this gas would be
approximately 50% of its current European exports. Russia can enlarge its customer base to a more
dynamic and rapidly growing Asia Pacific region. Chinese loans to Russia will aid crisis affected
Russian gas companies to invest in pipeline network circumventing Ukraine, which would, in turn, help
it to gain back European gas customers.

China has wisely invested in assets of major oil and gas companies across the globe to insulate its
economy from frequent oil shocks.

The Russo-Chinese Oil and Gas Agreements Initiate a New Published Oct 2009
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Capitalizing on Low Asset Values During the Global Financial Crisis, China has
Partnered with Major National Oil Companies
China’s energy demand is expected to increase by 150% in 2020 due to rapid industrialization and
infrastructure spending. The country’s oil consumption is expected to grow seven times faster than
that of the US. Increasing oil consumption and declining reserves makes China vulnerable to peak oil
prices. With a major portion of the global oil reserves in politically sensitive geographies like the Middle
East, China has strategically invested in oil and gas assets across different countries to reduce its risk
from supply disruptions or price shocks.

Global economic recession has reduced oil consumption across the world, which, in turn, has affected
the revenues of oil and gas companies. This has led to devaluation in company asset values. Lower
liquidity levels have forced major oil and gas companies to either defer or cancel their projects, which
have further influenced the cash availability as the projects initiated had no return on investments.
Major oil and gas companies witnessed dips in their market capitalizations and they were in need of
investments to mobilize their long term projects.

Though the recession has left the world’s major lending organizations and investment banks with
lower cash reserves, China has held the largest pile of cash reserves of $1.6-1.8 trillion. In the wake of
uncertainty in global markets, the huge financial strength is both an asset and a liability. The country
needs to diversify its cash reserves without influencing the US dollar, since China also holds large
reserves in the form of US bonds. China has discovered a prudent method to lock its reserves in the
form of oil. With the total commodity demand in China growing at 20% a year and auto market at 50%
per annum prior to recession, the country realizes the need to have access to oil in order to sustain
this growth. China has invested in oil and gas assets in almost all geographies capitalizing on
descending asset values. China has struck better oil deals at more favorable price since June last
year.

The Russo-Chinese Oil and Gas Agreements Initiate a New Published Oct 2009
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Figure 2: Global, Major Oil Deals by China, 2009

Chinese oil and gas

companies partnering with
Turkmenistan, Kazakhstan
CNPC strikes Iraq’s Rumaila
oil field deal with BP
China and Russia in Multi-billion
dollar deal and seven agreements
of worth trillions of dollars.
Russian Transneft,
OAO Roseneft Oil Co
and OAO Gazpromgain

PetroChina invests in Canadian

oil sands by buying stakes
Chinese oil majors are in negotiation
for oil assets in Angola, Libya, Nigeria
and Ghana, however few had
set back due to
competitive bidding and other reasons

$16 bn investment in Venezuela

and oil for loan agreements with
Brazil’s Petrobaras. Chinese firms
bid to expand in Argentina for oil

Source: GlobalData

China has invested in Russia, one of the top ten oil reserve destinations and in gas rich Eurasian
countries. In August 2009, Chinese oil firms bid to expand in Argentina, a Latin American country. In
September 2009, China agreed to pay $1.7 billion to Athabasca Oil Sands Corp (AOSC) to own a 60%
stake in the Canadian company's MacKay River and Dover oil sands projects. The country has
announced $16 billion deal with Venezuela for oil exploration in Orinoco Belt in Eastern Venezuela in
the same month. It realizes the importance of a lower oil and gas asset value and has thus struck
beneficial deals globally.

China’s Partnership with Russia Will Secure it a Strong Position in Influencing the
Global Oil & Gas Industry Dynamics
A global recession has led to a lower demand which has resulted in recurring affects on the planned,
long term investment projects worldwide over the last one year. China has swiftly recognized that
global oil prices are associated with the US consumption patterns and this is leading to irregular rise
and drop in oil prices. The global financial markets are closely related to US’ overall consumption and
a sudden decline in US’ consumption has created upheavals in the global markets. China has been
aiming to reduce the dependence of the global financial markets on US consumption by having a
tighter hold on oil prices.

Oil prices can be properly managed by reducing their reliance on consumption in a particular
geographical area. Chinese domestic consumers have not paid high prices for any of their

The Russo-Chinese Oil and Gas Agreements Initiate a New Published Oct 2009
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commodities in the past and oil has been no exception. This means that China needs to control global
prices, particularly of valuable resources like oil. Moreover, sustained economic progress is possible
with a better control on oil supplies and favorable oil prices. China has also recognized the need to
access and secure uninterrupted oil supplies effortlessly, hence it is signing of billion dollar deals with
cash strapped, oil rich nations.

China’s oil and gas partnerships with Russia will strengthen its relations with the country and will
enable China to take hold of one of the world’s largest oil and gas reserves. Russia has the world's
largest natural gas reserves, the second largest coal reserves, and the eighth largest oil reserves. By
partnering with Russia, China hopes to procure oil for the next two decades without being susceptible
to peak oil prices and supply disruptions. China being the second largest oil consumer, intends to
reduce its oil dependence on politically sensitive geographies, which usually influence oil price
dynamics. In the process, it has hopefully managed to lock up huge oil supplies for its own domestic
consumption for the next few decades.

The Russo-Chinese Oil and Gas Agreements Initiate a New Published Oct 2009
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