Russia And China Inked Huge Oil Deals Amid Soaring Ukraine Tensions
Moscow’s state-owned oil giant, Rosneft, signed a US$80 billion 10-year deal to supply the China National Petroleum Corporation (CNPC) with 100 million metric tonnes of oil.
This increase in crude oil delivery volumes and mechanisms to China is part of a broad-based strategy to circumvent to as great a degree as possible the effects of international sanctions against Russia.
This multi-level cooperation strategy between Russia and China provides financing into Russia from China, regardless of possible sanctions from the U.S. and its allies.
At around the same time as Russian President, Vladimir Putin, had his first in-person meeting with his Chinese counterpart, Xi Jinping, for nearly two years – at the opening of the Winter Olympics ceremony in Beijing – and reiterated that there is ‘no limit’ to how far Russian and Chinese friendship may go, a slew of huge new cooperation deals in the oil and gas sectors and beyond were being announced by state news agencies on both sides. As analyzed in-depth in my new book on the world oil markets, the two countries have been working in an increasingly coordinated manner in the past few years in multiple operational spaces, all towards the central aim of weakening the dominant global power position of the U.S., and then supplanting it in this role. Nowhere has this coordinated strategy been more obvious in oil and gas sector terms than in the Middle East, especially since the U.S.’s unilateral withdrawal from the Joint Comprehensive Plan of Action (JCPOA) with Iran in May 2018. Its subsequent withdrawal from Afghanistan in September 2021, and then the ‘end of combat mission’ in Iraq in December 2021, has reinforced the Russia-China axis’s confidence that achieving their aim will only be a matter of time. Consequently, those countries in the Middle East who seek to portray themselves as neither on one side or another – and, bizarrely, chose to excuse how China is likely to deal with their own Muslim cultures in their recent attempt to seal a China-GCC Free Trade Agreement – either do not realize that the current power struggle between the U.S. and its allies, and China-Russia and its allies, is a zero-sum game, or are jejune at best.
The latest specific series of oil and gas deals announced between Russia and China are wide-ranging and highly significant for oil and gas markets worldwide and build on the relentless roll-out of project after project in the Middle East in recent years, especially by both countries in Iran and Iraq. These two Middle Eastern countries offer a much bigger prize in terms of reserves, capacity, spare capacity, and the likelihood of new field discoveries in both the oil and gas sectors than Saudi Arabia. China has focused recently on signing multiple deals with Iraq, some for headline-grabbing field developments but many more employing the more under-the-radar model of individual ‘contract-only’ awards to Chinese companies that few people have ever heard of, but all fully State-backed and State-funded (every single company in China functions as part of the State apparatus).
Beijing can afford to focus on Iraq now, given that it already regards Iran – via its all-embracing 25-year deal with Tehran – as “a de facto client state”, a senior oil and gas industry figure who works closely with Iran’s Petroleum Ministry exclusively told OilPrice.com last week. Aiming to utilize the political ambiguity increasingly shown by several Middle Eastern states who previously could have unequivocally been said to have been U.S. allies, China has also sought to engineer ‘Hotel California’-type deals with them – ‘You can check out any time you like/But you can never leave’ – through funding associated with its multi-generational power-grab project, ‘One Belt, One Road’. Russia, in the meantime, is more focused currently on Iran – a policy focus agreed with China, according to the Iran source – continuing to work alongside it in Syria, and on several oil and gas field developments.
According to the official state announcements from Russia and China last week, in the oil sector, Moscow’s state-owned oil giant, Rosneft, signed a US$80 billion 10-year deal to supply the China National Petroleum Corporation (CNPC) with 100 million metric tonnes of oil over the period (slightly over 200,000 barrels per day), shipped from Kazakhstan to refining plants in Northwest China. This will occur alongside the other exports of Russian crude oil to China and in 2021, Russian crude shipments via pipelines to China were 40 million metric tonnes (just over 800,000 barrels per day), according to Russian pipeline operator Transneft. None of this will affect the continued flow of Russia’s principal crude oil export route to China – the 80 million metric tonnes per year (circa 1.6 million 1.6 million barrels per day) East Siberia-Pacific Ocean pipeline that moves oil directly to China, as well as via the port of Kozmino.
This increase in crude oil delivery volumes and mechanisms to China is part of a broad-based strategy to circumvent to as great a degree as possible the effects of international sanctions against Russia that had been in development since the takeover of Crimea, as also examined in depth in my new book, which the Kremlin always regarded as a ‘trial run’ for the takeover of the entire country. One element of this has been Rosneft’s swift development of the Northern Sea Route (NSR), which allows for relatively unimpeded delivery of crude oil to China. Rosneft is also currently actively pushing the development of the Vostok Oil project in Russia’s Far North that includes the Vankor cluster, the Zapadno-Irkinsky block, the Payakhskaya group of fields, and the East Taimyr cluster. Rosneft chief executive officer and close friend and adviser of Putin, Igor Sechin, also promised that the Vostok Oil project and corollary build-out of the NSR would involve the creation create a “new oil and gas province” on Siberia’s Taymyr peninsula, with the complete project representing a total investment of RUB10,000 billion (US$135 billion), including two airports and 15 ‘industry towns.’ Sechin added that Rosneft’s Arctic developments would eventually produce 100 million tonnes of oil per year, with 30 million tonnes of oil being sent from the Arctic along the NSR between now and 2024 alone.
In the gas sector, last week’s main announcement was that Russian state gas giant, Gazprom, signed a 10 billion cubic meters per year (bcm/y) deal to supply gas to CNPC, adding to another supply contract between the two companies signed in 2014 – a 30-year deal for 38 bcm per year to go from Russia to China. This, in turn, is part of, but augments, the ‘Power of Siberia’ pipeline project – managed on the Russian side by Gazprom and on the China side by CNPC – that was launched in December 2019. According to company comments, Gazprom is also developing ‘Power of Siberia 2’ – with shipments to be sent to China via Mongolia – that will increase gas supply to China by an additional 50 bcm per year. These developments follow the 50.5 percent increase year-on-year (y-o-y) in 2021 of Russia gas exports to China, with the volume of as going being delivered by pipeline during that period increasing by 154.2 percent y-o-y, to 7.54 million metric tonnes, according to January data from China’s General Administration of Customs.
This multi-level cooperation strategy between Russia and China provides financing into Russia from China, regardless of possible sanctions from the U.S. and its allies, including the much-vaunted barring from the SWIFT international payments system – which, even in the event of a full invasion of Ukraine by Russia are unlikely to be effective. On the other side, it provides China with an increasing proportion of the oil and gas it needs to power its attempt to overtake the U.S. as the world’s largest economy by nominal GDP by 2030 at the latest. It is already the world’s largest economy by purchasing power parity, the largest manufacturing economy, and the largest trading nation. Any interim gaps, both in finance for Russia or oil and gas supplies for China, can be increasingly filled by the cooperation of politically ambiguous states around the globe, particularly amongst the Middle Eastern oil-producing countries. Not only are they pools of natural energy resources for China’s growth machine but also their apparent increased willingness to switch away from US$-centric oil and gas markets, as analyzed in-depth in my new book on the world oil markets, would neuter the single most effective power that the U.S. still has in the world today.