Who's afraid of Rosneft India?

A vilification campaign against Rosneft has begun in right earnest, says Ambassador M K Bhadrakumar.

India has been witnessing in recent years a turf war between the world’s leading arms vendors. Now an energy war seems to be breaking out as well.

On one side is, again, Russia. The other protagonist is acting behind the scenes but is certainly someone who is rattled by the Russian oil major Rosneft’s recent acquisition of Essar India and its massive investment plans in the Indian market.

This is a high stakes war, since the India’s energy market is expected to expand dramatically in the period ahead commensurate with the economy’s potential for high growth.

Briefly, a disinformation campaign has begun to malign Rosneft ever since the Russian oil major completed in August its acquisition of Essar Oil for $12.9 billion to make a dramatic entry into the Indian retail market.

The acquisition places in Rosneft’s hands India’s largest network of private petrol pumps, the country’s second-largest refinery, a 1,000-MW power plant along with the Vadinar port and oil terminal.

Rosneft aims to scale up Essar’s petrol pump network to 6000 outlets in India from the current level of 3500. It plans to make a total investment exceeding $30 billion to develop business in India, which will probably be the biggest-ever single investment in the Indian economy by a foreign company. To be sure, this will rev up India’s fuel retailing market as well.

Now the problem begins. India’s fuel retaining market has two other players already (besides the dominant State firms in the business). One of the two is Shell and the other -- Reliance. Evidently, for the Indian consumer, competition in the retail market means better services. And for the Indian economy as a whole at the present juncture, Rosneft’s $30 billion prospective investment plans become a bonanza.

But the flip side is that the players who are already in the Indian retail market are better off without an oil major like Rosneft also joining the arena. So, a vilification campaign against Rosneft has begun in right earnest.

The campaign seems to aim at pressuring the government to go slow in granting approval to the Rosneft’s massive investment plan to develop India’s fuel retail market.

Interestingly, Rosneft India has as its chairman Tony Fountain who previously worked with BP and Reliance Industries and knows the Indian market like the back of his hands. Clearly, Rosneft India is no pushover.

The Indian Express has a typical piece, here, on Rosneft. Succinctly put, it raises a hullabaloo that last month CEFC China Energy acquired a 14% stake in Rosneft. Of course, raising the China bogey is the smart thing to do before the Indian audience.

What really happened is that the Chinese company CEFC, which is a private conglomerate with interests in energy and financial services, has bought the shares held by Switzerland’s Glencore and the Qatar Investment Authority in an offshore vehicle. The deal in effect restructures a €10.2bn purchase of Rosneft shares by Qatar Investment Authority and Glencore in December 2016.

Put differently, Glencore and Qatar for reasons of their own were keen to rethink their 19.5 per cent holding in Rosneft (which was purchased in a deal funded by Italy’s Intesa Sanpaolo and a number of Russian banks.) The restructuring means that the Russian state will hold a controlling 50 percent stake in Rosneft, while the UK oil company BP owns 19.75 percent, CEFC 14.16 percent, Qatar 4.7 percent and Glenmore 0.5 percent (subject, of course, to final approvals and regulatory clearance.)

Interestingly, CFEC will pay a premium of around 16 per cent above Rosneft’s 30-day weighted average price, which becomes a lucrative transaction for Glencore, valued at $8.9 billion.

For Glencore, the Swiss-based miner and commodity trader, the deal enables it to repay the debt taken on to fund the December 2016 transaction but at the same time, crucially, retain a supply agreement over 220,000 barrels a day of Rosneft oil production, a deal that has helped cement the company’s position as the world’s second-biggest independent oil trader. (Glencore’s oil trading volumes jumped to 6.15m barrels a day, from 4.41m a year, after it bought the stake in Rosneft last year.)

As for Moscow, as a knowledgeable British expert put it, the CEFC deal “allows the Kremlin to show western governments that it could replace European and US co-operation and capital with Chinese companies” and is linked to the politics of Western sanctions against Russia.

As for China, one doesn’t have to be a rocket scientist to assess its motivations in paying premium price to acquire a stake in Rosneft. Simply put, the CEFC deal aims at bridging Rosneft and the Chinese market, which is the world’s fastest growing energy market. (The authoritative Hellenic Shipping News has carried a piece on the subject entitled Putting On Weight: Russia-China Crude Oil Trade.)

In fact, on September 3 Rosneft and the CFEC signed a cooperation agreement for joint exploration in Siberia. According to a Rosneft statement, the agreement also makes provision for “joint activity in such areas as refining, petrochemicals and crude and product trading.”

Again, in a second agreement with CFEC, Rosneft has a contract to increase direct supplies of crude oil to China. A Reuters report quoted Rosneft CEO Igor Sechin as saying, “The agreements signed today (September 3) fully reflect the Company’s strategy, whose priorities includes strengthening relations with the Asia Pacific countries and, in particular, with China.”

The Indian Express piece  seems to inject a dose of paranoia into the Indian mind by advancing the maverick thesis that CFEC is about to control the Indian oil market though the vehicle of Rosneft.

Which is of course complete poppycock that betrays a total ignorance of the ethos of the Russian oil industry and the functioning of its flag carriers such as Rosneft or Gazprom in the world market. (By the way, Gazprom has replaced ExxonMobil as the world’s number one oil company in 2017.)

Rosneft has named the former German Chancellor Gerhard Schroeder as the new chairman of its board of directors. It signals that Europe’s oil market will remain Russia’s primary focus for a foreseeable future.

China knows this home truth, too, and if it is making thoughtful investments in the Russian oil companies and oil fields, its goal is to ensure reliable supplies for the Chinese market as well.

The Modi government did splendidly well in welcoming Rosneft’s entry into its energy market. Rosneft’s plans to invest over $30 billion in the Indian market conveys a big political message by the Kremlin.