CNPC Opens the Door to Russian Energy Resources

Rosneft of Russia recently announced that it signed an agreement
with CNPC on October 16th, 2006. Both sides made an investment
of 10.0 million rubles and established Vostok Energy Ltd. The
equity ratio between Russia and China is 51:49. (CCR2006, No.
31)
    The energy cooperation between the two countries has made
remarkable advances in recent years. Chinese oil companies have
entered the Russian oil/gas recovery market through purchasing
shares in Russian oil companies and participating in asset
transfers. It is however the first time to form joint venture
company with Russian oil company.


New breakthrough in cooperation

Preparations for the establishment of the joint venture company
may date back to several months ago. In March 2006, the general
manager of CNPC and the president of Rosneft signed a framework
agreement called the "Agreement on Basic Principles for the
Establishment of a Joint Venture Enterprise by CNPC and Rosneft
to Promote Oil Cooperation." It was agreed that Russia and China
would establish a joint venture company to conduct integrated
cooperation in oil exploration and development in Russia and
refining and sales in China.
    When Rosneft was unfolding a worldwide IPO (initial public
offering) in July 2006, CNPC purchased shares in Rosneft with
US$500 million. According to executives from CNPC, its move of
equity participation was not intended for investment but for
future cooperation. After a period of preparations, the joint
venture company was finally established.
    The Board of Directors in the company is composed of 5
persons. Rosneft has 3 and CNPC has 2. The new company is mainly
engaged in oil exploration in Russia and acquisition of licenses
for deep-layer oil resources. It will also undertake production,
product sales and new technology applications to increase
exploration and production efficiency.
    Russia has always maintained strict control over the energy
sector - regarded as one of the strategic sectors. According to
the laws and regulations of Russia, foreign companies intending
to get into the oil sector must cooperate with domestic oil
companies of Russia and the Russian side must hold controlling
equity. It is definitely impossible in near future for Russia
to allow foreign companies to hold controlling equity in its oil
companies.
    "One reason for the successful establishment of the joint
venture company," said an expert from the China Institute of
Contemporary International Relations, "is that it conforms to
the provisions in the framework agreement already signed by CNPC
and Rosneft. The other reason is that the equity structure of
the joint venture company fully conforms to laws and regulations
of Russia. The process for the establishment of the joint venture
company shows that Russia still has strict control on its energy
sector, but it is a good beginning for China and a new
breakthrough in cooperation. It means that Chinese oil companies
have opened a new path to enter the Russian market. Sectors for
cooperation between the two sides will surely be further
expanded in the future. "


Needs of both sides

The establishment of Vostok Energy Ltd. is not only a logical
result of the energy cooperation between China and Russia but
also representative of Rosneft's new oil strategy. The
establishment of the joint venture company is motivated by the
needs of both sides. China needs to buy oil from Russia to satisfy
the domestic market demand. Russia needs the huge market in China
for oil export.
    The capacity of pipelines from China to Russia's borders has
reached 30 million t/a. More oil/gas pipelines will be
constructed in the future. Where can China get such great
quantities of oil/gas resources? Huge oil/gas resources in
Russia can solve this problem.
     Data from the Ministry of Commerce show that China imported
12.78 million tons of oil from Russia in 2005 and the imported
amount is expected to reach 15.0 million tons in 2006.
     Reportedly, Rosneft will become the primary supplier of
China's oil imports. According to the agreement reached between
the Russian Railway Company and Rosneft in January 2005, Rosneft
plans to export 8.88 million tons of oil to China each year from
2006 to 2010 through the Russian Railway Company.
    As the present situation stands, the amount of oil products
supplied by Rosneft to China is much higher than the figure
mentioned in the agreement. According to the Russian minister
of industry and energy, Russia plans to further increase the
oil/gas output and export amount. The president of Rosneft
thinks that Asian-Pacific countries, China in particular, may
become the main markets for oil products from Siberia and Far
East.
     "73% of the oil and oil products supplied by Russia to China
this year is from Rosneft," said the president of Rosneft. "55%
of the resources of the company are in the East Siberia and Far
East regions and it is meaningless to get these resources to
Europe."
     "The European market is almost saturated," said an expert.
"The biggest market in the east remains to be China. The
substantial need in China can not be overlooked. "The
establishment of Vostok Energy Ltd. will create good
opportunities for Rosneft to enter the oil/gas processing and
sales market in China.


General model

When Rosneft was unfolding its worldwide IPO in July 2006, CNPC
purchased 66.2252 million shares in Rosneft with US$500 million
and became a shareholder in the company. The equity CNPC holds
today is only one sixth of its target of US$3.0 billion.
     According to market analysts, it is only with firm support
from international strategic investors that Rosneft achieved
the successful insurance of its shares. The establishment of the
joint venture company this time is a compensation to CNPC to
encourage the company to further participate in the development
of oil/gas resources in Russia.
     CNPC becoming a shareholder of Rosneft "has without doubt
added a new vigor to the cooperation between the two companies,"
said the chief of the Asian-Pacific region office of Rosneft.   
     No matter whether the Russian side has the intention to make
compensation or not, the oil cooperation between the two
countries has taken a specific and solid step forward. The joint
venture company will likely bid for exploration and recovery
rights for oil/gas resources in the East Siberia and Far East
regions of Russia.
     "Compared with Chinese oil companies, the joint venture
company will have fewer barriers in the recovery of oil/gas
resources in Russia, "said experts from CNPC Research Institute
of Economics and Technology." Besides, China can import more
oil/gas resources from Russia through pipelines and also gain
considerable advantages in price talks. "
    According to the reciprocal principle in the cooperation
between CNPC and Rosneft, the two companies may soon set up a
joint venture company in China. Once the plan is executed, it
will be still ea