Russia Turns Away from Europe, Focuses on China

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Russia’s state-controlled oil giant Rosneft has signed a 25-year deal to supply $270 billion worth of crude oil to China, and the country’s largest independent natural gas producer, Novatek, has agreed to a deal with Sinopec for a $20 billion infusion in a liquefied natural gas (LNG) project. Lagging demand from Russia’s traditional Western European markets, combined with efforts by Europe to diversify its energy supplies, have basically forced Russia to look elsewhere for customers. And where better than the world’s largest consumer of energy.

Russia already sends 15 million metric tons (about 110 million barrels) of crude annually to China through the Eastern Siberia Pacific Ocean (ESPO) pipeline that was completed in 2009. That is a small percentage of Russia’s total crude production of about 3.8 billion barrels a year.

Rosneft, which controls about 40% of that production, also signed a deal with commodities trading house Trafigura to supply the trading house with about 73 million barrels of crude over the next five years. The Russian behemoth also signed a third deal to supply the Czech Republic with nearly 60 million barrels of crude through 2016.

Rosneft, which last year acquired all of TNK-BP’s assets from its previous owners, BP PLC (NYSE: BP) and a Russian firm owned by four of the country’s richest oligarchs, has not been a particularly well-run enterprise. The oil giant issued public shares in 2006 at a market cap of around $80 billion, which has shrunk to less than $70 billion today, about the same amount as its net debt. Rosneft paid a total of $55 billion for TNK-BP.

About a quarter of Russia’s GDP comes from its oil and gas production and more than 50% of the country’s total revenues. Falling crude prices and a restive European market for natural gas threaten to weigh heavily on growth. Closer ties with China are the current solution.

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