A Rosneft-led group of buyers just closed a deal for 98% of the Indian firm Essar Oil’s Vadinar refinery and oil terminal facility in a masterstroke for Russia’s Pivot to Asia.
In conjunction with the Dutch oil firm Trafigura and Russian fund United Capital Partners (UCP), the Russian state oil firm Rosneft along with closed a $12.9 billion deal with Indian firm Essar Oil for a combined 98% stake in its Vadinar refinery, oil terminal, and many filling stations. The refinery has a capacity of 405,000 barrels per day (bpd) and gives Rosneft — Russia’s leading oil producer — an open door into the Indian market. A year of back and forth produced a deal for Rosneft that reduces dependence on both Chinese consumption and capital and cements Russian-Indian ties as Russia seeks to realize its pivot to Asia.
Rosneft goes east
China has led demand growth for oil for years, again posting record highs for imports in 2016 as low prices have affected China’s domestic production and proven attractive for importers such as smaller refiners. Russia has fought hard for market share reaching exports at 1.1 million bpd this year. Rosneft did reach an investment decision with CNPC to build a refinery in Tianjin by 2019 this year to secure its position in China. Further, China is expected to account for over half of Russia’s oil export growth in its Far East for the near-term. However, economic trends, Russia’s trade goals, and a lack of trust between Russia and China make India the real prize.
The International Energy Agency predicts Indian oil demand will increase from 4.2 million bpd to 5.1 million by 2021. India is now the world’s third-largest oil importer and widely considered the new driver for demand growth. Demographics and economics are on its side. China’s population isn’t growing much, is aging, and its economy is now shifting towards services to correct over-investment and overcapacity in the manufacturing sector. India’s growing population is younger and Prime Minister Modi’s manufacturing initiative “Make in India” aims to significantly expand the nation’s manufacturing base and India is now the world’s fastest growing major economy. Indian manufacturers will need oil and Indian oil firms are seeking overseas investments accordingly.
Down for the upstream
Rosneft’s decision to allow Indian firms to buy large stakes of its subsidiary Vankorneft is just as significant as the refinery deal. The state places a premium on the strategic value of Russia’s resource wealth. As Rosneft’s oil fields in Western Siberia and the Urals decline, the company has shifted towards fields in Eastern Siberia and the Far East. The Vankor field is a crown jewel and Tass-Yuriakh likewise vital in this shift in Russia’s reserve base.
Vankor — Russia’s second-largest field — accounts for 421,000 bpd while Taas-Yuriakh is expected to account for 100,000 bpd by next year. Last September, Rosneft sold a 15% stake in Vankor to Indian state-firm ONGC. A further 11% of Vankor was sold to ONGC along with 23.9% to a consortium of Oil India Ltd., Indian Oil Corp. and Bharat PetroResources Ltd. All four companies are state-owned and their roughly $4.1 billion stake in the project is now equal to 49.9%. The three in the consortium also bought a $1.3 billion 29.9% stake of Taas-Yuriakh. India seems to have gotten past Russia’s instinctual distrust of significant foreign ownership of strategic oil and gas upstream assets by using its state-owned firms. That’s big news.
How to trust a bear
China’s energy firms don’t trust Rosneft. In 2013, Rosneft took tens of billions from CNPC and other firms to pay off its debts after the acquisition of TNK-B. Rosneft offered stakes in both Vankor and Taas-Yuriakh to CNPC but Chinese negotiators ran a hardline on pricing, felt the investments were too risky, and no agreements were reached. Rosneft likely had little intention of selling as it maneuvered for leverage. While Chinese banks still lend to Russian firms to keep projects alive, they’ve been exceptionally careful not to offend trading partners in the West by completely forgoing the sanctions regime. China’s interests limit its ability to jump into energy projects. India has been slower to move but faces fewer constraints.
Back in March, Rosneft CEO Igor Sechin called the refinery deal and prospective agreements to sell stakes of subsidiaries for the Vankor and Tass-Yuriakh fields an “energy bridge” to broader cooperation. The latest energy deals paired with defense deals to sell India S-400 missiles, form a joint venture to produce military helicopters, and a deal for jointly built stealth frigates. The defense deals were partially a palliative for recent military exercises in Pakistan but fit into a broader pattern. Russia’s resources—notably diamonds and coal—complement Indian industries well and these deals breathe new life into stalled talks for a free trade agreement between the Eurasian Economic Union and India. They also underscore increasing alignment between Russia and India’s regional interests.
Push and pull
In buying the stake in Vadinar and the filling stations, Rosneft and its corporate ally Trafigura, a leading seller of Russian crude, box out Iranian crude supplies’ market share in India. At the same time, agreements to ship large numbers of diamonds, large amounts of coal, more oil, and industrial products pertinent to defense deals will encourage transit through the Indian-Iranian port at Chabahar.
All of these states have interests in China—Russia seeks better terms for energy projects, India wants to ensure sustained growth to catch up, and Iran needs to diversify its export markets with the end of sanctions. By claiming a leading role in Indian energy security, Russia has formalized a new means of influencing the Indian Ocean region and promoting regional trade. Defense deals will also allow Russia to counterbalance China by aiding India’s military. As always, success is hampered by Russia’s domestic constraints but in geopolitical terms, the Essar Oil deal is a coup.