Majors' Russia Exit Opens Door for China

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China’s close relationship with Russia and its rejection of international sanctions against Moscow could make its energy companies prime candidates to acquire assets divested by the likes of BP, Shell and Exxon Mobil.

However, sources at Chinese companies tell Energy Intelligence they are not in any hurry to pick up assets from companies exiting Russia over its war in Ukraine.

As Russian troops continue their assault on cities in Ukraine, Foreign Minister Wang Yi described the China-Russia relationship on Monday as “rock-solid” and said “there is a bright prospect for cooperation between the two sides.”

The Bloomberg news service reported this week that Beijing is talking to state-controlled oil and gas companies, including China National Petroleum corp. (CNPC) and Sinopec, about investment opportunities in Russia.

But that does not necessarily mean that deals will be struck any time soon.

“We will wait and see,” a source at CNODC, an overseas upstream subsidiary of CNPC, told Energy Intelligence.

On the other hand, the possibility of a move into Russia cannot be dismissed, especially given that Chinese buyers would likely face limited competition for abandoned assets as much of the world cuts off its trade and investment ties with Russia.

Recent Historical Precedent

There are certainly historical precedents for closer energy ties between China and Russia during periods of tense relations between Russia and the West and between China and the West.

Western sanctions against Russia after its 2014 annexation of Crimea opened a door for Chinese companies to invest in Russia as it started to pivot toward closer ties with Asia.

China and Russia signed their first pipeline gas deal in 2014, with deliveries of gas via the Power of Siberia pipeline starting up in late 2019 and helping Russia become China’s third-largest gas supplier.

And in 2016 Chinese banks agreed to finance Yamal LNG, Russia’s second LNG project, in which CNPC holds a 20% stake and China's Silk Road Fund holds 9.9%

The trade war that flared up between the US and China under former President Donald Trump also led to closer energy ties between China and Russia.

Among other things, China imposed import tariffs on US LNG and China National Offshore Oil Corp. (CNOOC) acquired a 10% stake in Russia’s Arctic LNG 2 project, which is scheduled to start producing LNG in 2023.

China’s biggest refiner Sinopec has upstream interests in Russia, also owns a 10% stake in Russian petrochemicals producer Sibur and is a shareholder in the Amur petrochemicals complex in Russia's Far East.

But Will Chinese Companies Bite?

Chinese and Russian energy companies have long grumbled at how difficult it is to work with each other.

A source with a private Chinese company that operates overseas projects told Energy Intelligence that the company is not interested in Russia because projects there typically offer low returns on investment.

But a China-focused analyst told Energy Intelligence that “once sanctions are finalized and things settle down, you will see them moving in, especially when all the majors are leaving.”

However, Russia has become much more isolated since the invasion of Ukraine and investing there could be risky.

“Our expectation is that the Russian state will take these stakes back [from Western majors]. While they could be offered to Chinese oil companies, they will be somewhat of a poisoned chalice,” Sanford Bernstein analysts said in a research note this week.

“It could be that state funds like the Silk Road Fund could acquire, but given that this fund has stopped lending to projects in Russia, even this seems doubtful,” they added.

M&A, Corporate Strategy , Sanctions, Military Conflict
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