Few Medals for Russia’s Foreign Energy Policy

Few Medals for Russia’s Foreign Energy Policy

Moscow, Russia - 15 January, 2015: People walking and taking pictures in front of State Historical Museum building on the Red Square, Moscow at January 15, 2015.

Russia may have raked in plenty of medals at the Sochi Olympic Games, but some controversial oil and gas deals outside the country over the past year will garner few, at least from western judges.

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Russia inks oil exploration deal with Syria

On Christmas Day last year, for example, the Syrian government signed a deal with Russia allowing the first-ever exploration off Syria’s coast, AFP reported. Condemned by Syria’s rebel opposition, the agreement was inked by Syrian Oil Minister Suleiman Abbas and included Syria’s General Petroleum Company and the Russian company Soyuzneftegaz. It paves the way for a 2,190 km2 block of the Mediterranean to be explored. Soyuzneftegaz will first carry out seismic surveys and drill at least one exploration well—then depending on success, more drilling and potential development and production would follow. About $90 million is to be spent for the seismic and one well, fully funded by Soyuzneftegaz.

To western eyes, the contract signals Moscow’s continued support of the Assad regime and, in turn, a present from Assad for Russia’s siding with his government in Syria’s civil war. Although any oil production will be several years away, the deal gives Russia a stronger toehold into the eastern Mediterranean energy game, which involves Cyprus, Lebanon, Egypt and Israel; and will help strengthen their role as suppliers of natural gas to Europe. Other Russian firms may follow, by participating in Lebanon’s first licensing round. And Gazprom has already secured exclusive export rights for LNG from Israel’s offshore Tamar deposit.

Plans for South Stream pipeline plough ahead

In another controversial move, Russia announced in early December its determination to proceed with the Gazprom-led South Stream natural gas pipeline which bypasses Ukraine, against EU rules. Those rules stipulate that one company may not be both pipeline operator and gas supplier. The reason Russia gave was they could no longer trust Ukraine to sell gas through its territory, after price disagreements between them prompted Ukraine to block deliveries in 2009. Ukraine now says they will maintain normal relations with Russia—but political and social upheavals could make keeping that promise difficult. Russia insists on their own way however: after all they are footing most of the $22 billion price tag.

These are just two examples of Russia’s flurry of international deals in the past year—others are trending.

Russia ramps up relations with China

October saw several major contracts with China. Russian companies signed a slew of deals with China, seeking to lock in sales to fund costly production and pipeline projects that will direct exports away from Europe to Asia.

The agreements, announced during a visit by Prime Minister Medvedev to Beijing, brought Igor Sechin, CEO of state oil giant Rosneft, closer to his goal of exporting more than a million bpd to China. And gas independent Novatek secured a long-term contract to supply LNG, ahead of the lifting of state-controlled Gazprom’s export monopoly on LNG exports, expected next year. Gazprom, the world’s largest gas company, made some progress towards supplying pipeline gas to China, but after years of talks it may fail to seal a deal before its Russian rivals can compete for exports.

Prime Minister Medvedev hailed Rosneft’s agreement to supply 200,000 bpd over ten years to China’s Sinopec Group, in a prepaid deal worth US$85 billion. Analysts predict that the Rosneft-Sinopec deal, which is expected to start flow in 2014, will increase pressure on Sechin to develop new fields in eastern Siberia to increase pipeline exports to China from the current 300,000 bpd.

Russia senses China’s needs: leading energy analysts expect China’s oil imports to overtake those of the United States in 2017, rising to 9.2 million bpd by 2020.

It’s all part of a warming Russia-China energy relationship. In May last year Russia gave China a share of prized Arctic exploration licenses as part of a breakthrough deal, signalling how the world’s largest oil and gas producer is attempting to redraw the global energy map. China is emerging as the biggest buyer of Russian oil and gas; and it’s helping Russian companies diversify their export markets away from Europe. Another win for Russia: it’s an opportunity and cash cow to develop its extensive oil and gas fields.

Rosneft in particular came out as an active player in domestic transactions too. It acquired the remaining 49% share in Russian energy company ITERA Oil and Gas, for $2.9 billion. Internationally, in addition to activity in China, it’s also been busy inking a deal with Corporacion Venezolana del Petroleo, a subsidiary of PDVSA, to develop Venezuelan heavy oil. And in North America it’s secured a 30% interest in 20 Gulf of Mexico deepwater blocks held by ExxonMobil.

These deals are showing a renewed Russian prowess on the international energy scene into 2014.