Asian and European companies to invest in Russia

The first week of September saw Vladimir Putin's visit to Beijing, followed by the East Asia Economic Summit in Vladivostok, Russia. The events were notable for the signing of several important energy deals between Russia and foreign investors, as well as for some important absences.

Low oil prices and Western sanctions continue to batter the Russian economy, respectively deflating the oil and gas revenues that provide half of the country's budget and preventing access to key funding and technology for future hydrocarbon exploration in remote areas. The Kremlin has tried to address the latter issue by turning to China as an increasingly important trade and banking partner. The eastern pipeline route of the USD 400 billion Power of Siberia project is under construction, although first gas may be delayed until as late as 2021. Absent from the week's events was the finalisation of negotiations for the western route, Power of Siberia 2, recently delayed until 2016. Chinese firms are also winning more Russian service contracts. Even though Rosneft's and Statoil's future exploratory wells in the Okhotsk Sea are not under sanctions, a China Oilfield Services Limited (COSL) rig was recently contracted for next year's drilling in lieu of a Western or Russian firm.

However, price disputes and market volatility have resulted in some USD 110 billion in joint ventures between the two countries being stalled in recent times. Future yet-to-be-finalized deals therefore could also be vulnerable - such as Power of Siberia 2 and Rosneft's late-2014 invitation for CNPC to invest in a 10% stake in the major producing Vankorskoye field in the northeastern part of the West Siberian Basin (for which delays were reportedly due to pricing disagreements). But there is progress on the Vankorskoye front. At the East Asia Economic Summit, Rosneft and ONGC Videsh signed an agreement for the Indian company to acquire a 15% stake in the field for around USD 1.28 billion, with regulatory approvals expected by mid-2016. Vankorskoye is one of the biggest oil discoveries of the last 30 years and is a major source for the ESPO pipeline delivering crude to eastern China. It produced 440,000 b/d of oil last year.

At the summit, Gazprom also announced the signing of two deals with Germany's Wintershall and Austria's OMV. The Wintershall agreement is an asset swap originally agreed upon in late 2012 for the company to acquire 25% interest in the development of Areas IV and V of the Achimov Formation in the Urengoyskoye giant gas field in the northern part of Western Siberia. In exchange, Gazprom will receive 50% of Wintershall's E&P arm in the North Sea, as well as full interest in the company's natural gas trading and storage business (including Wingas, Wintershall Erdgashandelshaus Berlin, Wintershall Erdgashandelshaus Zug and gas storage operator Astora). For its part, OMV will receive a 24.98% stake in the same licences. What Gazprom will receive in exchange from OMV is yet undisclosed. Resources in blocks IV and V are estimated at 2.4 Bboe, with production expected to start in 2018 and reach a plateau of 750 MMcf/d.

Russia needs this investment as Soviet-era fields begin to run dry and current production levels slowly become unsustainable. While the Indian, Austrian and German investments are encouraging, in the face of frontier exploration with Western companies stalled by sanctions, China remains the partner that can guarantee the biggest cash influx.
Sinopec has interest in some 91 licences in the Volga-Urals Basin through Udmurtneft (its 49:51 joint venture with Rosneft), and in the Veninskiy Severniy licence in the North Sakhalin Basin, also known as Sakhalin 3, through VeniNeft (where it has a 25.1% holding in another partnership with Rosneft) For its part, CNPC has a 49% interest in Vostok Energy, a joint venture with Rosneft that operates two exploration blocks in the Nepa-Botuoba Basin, as well as 20% in the Tambeyskiy Yuzhniy licence and the future Yamal LNG export terminal. A framework agreement for Chinese investment fund Silk Road to obtain a 9.9% stake (valued at USD 1.4 billion) in the terminal was also signed in Beijing during the Russian President's visit.

The most important news from the Beijing visit was the signing of a memorandum of understanding between Sinopec and Rosneft for the former to obtain a 49% stake in the Rosneft subsidiaries operating the West Siberian Russkoye and the East Siberian Yurubcheno-Tokhomskoye fields, which the companies plan to jointly develop. Russkoye is located in the Nadym-Taz Province and has 2P reserves estimated at 2.5 Bbbl of oil and 3.2 Tcf of gas. Yurubcheno-Tokhomskoye is in the Baykit Basin and has 2P reserves estimated at 894 MMbbl of oil, 90 MMbbl of condensate and 5.6 Tcf of gas. The Chinese state oil company also signed a preliminary agreement to acquire a stake in Sibur, Russia's largest petrochemical company.

For years, foreign stakes in Russian upstream assets were limited to sub-50% interest in oil fields with reserves of more than 70 MMt and gas fields with more than 50 Bcm. But as the economic situation gets more desperate, the rules for entry may change. Russian Deputy Prime Minister Arkady Dvorkovich announced earlier this year that the "psychological barrier" preventing such large stakes could be ignored in the future, for Chinese investment in particular. The recent joint development agreements with Sinopec show that while the 50% barrier is still up, Russia may work on a more equal basis with its partners in the future.

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29 September 2015, Sergey Myakishev

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.