Growing Energy Ties between Moscow and Beijing

By Fiona Baker

big-oil-new-no-1-f0d0052bc83f8775A $270 billion, 25 year deal between Rosneft, a Russian state-controlled oil company, and China National Petroleum Corporation (CNCP), and the announcement that CNCP would take a 20% stake in a $20 billion liquefied natural gas project—both occurring during the Saint Petersburg International Economic Forum—are indications of an increasingly strong relationship developing between Russia and China. President Putin’s announcement during the forum that the two countries have identified energy and high-tech industries as two areas of focus for further development and cooperation further demonstrates the growing convergence of interests of the two big neighbors. In the coming year, oil produced in Western Siberia, previously for export to Europe will head to China.

Amid stagnant energy demand in Europe and the shale gas boom in the United States, the oil and gas centered economy of Russia has been under pressure in a declining global energy prices scenario. The long-term agreements with China will provide a steady flow of revenue from the oil and gas sector, offsetting losses from a declining European demand and the increased competition from the U.S. Moreover, Russia’s pivoting away from Europe may contribute to price increases across Europe.

Over the next 25 years, Rosneft will supply China with 365 million tons of oil. China already receives 15 million tons of oil annually from Russia; Rosneft plans to increase oil shipments 13% from July through September. In 2014 China is expected to receive 17 million tons of oil and 20 million tons in 2015; in return Rosneft will receive an advance payment of $60 billion. This advance payment will allow Rosneft to reduce its debt burden and to develop remote Arctic fields. The pre-sale of oil over the 25 year period provides Rosneft with a predictable cash flow to finance further growth and acquisitions.  

These deals will likely contribute to greater geo-political understanding between Moscow and Beijing, affecting the balance of power both in Eastern Europe and Asia.  

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