An Uphill Road for Rosneft, CNPC
Joint ventures of Rosneft and CNPC are not moving ahead, and the Moscow media reports the Russian state company’s boss wants to resume talks with the Chinese partner during the week to give a new jolt to the overhyped but impotent projects.
The upstream JV in Eastern Siberia, LLC Vostok Energy, has been mothballed after the licenses it obtained proved to be uninspiring. The downstream venture, a $5-billion refinery project in Tianjin, is also in limbo. The plant with the annual capacity of 13 million tonnes (including 9 million tonnes to be supplied from Russia) was to become operational by 2015, but the parties have been negotiating ‘technical and economic conditions’ since 2010 without actually doing anything tangible.
The new round of talks will, paradoxically, focus not on the missing timeframe of the refinery construction, but on the way to market products from the refinery that has not been built yet. Rosneft insists it wants the joint venture to access China’s domestic fuel market by creating a network of 300 retail outlets. Under an alternative scenario, a portion of the Tianjin refinery’s production would be exported, the company hopes.
In every sense, such talks are theoretical and speculative. Without a working refinery—and even without a realistic feasibility study for that refinery—it makes no sense to negotiate sales.
It makes no sense either to talk about it because the Chinese fuel market is still regulated, and the prices are heavily subsidized, eroding the refinery margins. Although the authorities initiated a more flexible pricing mechanism in March, the refiners cannot pass on high crude costs to consumers because the government keeps controlling retail prices to help curb inflation.
Prospects of the Tianjin joint venture are bleak. China has already installed an excessive refining capacity of over 11 million barrels per day, doubling since 2000, and is going to add another 3 million barrels per day by 2015. The country, if the International Energy Agency’s predictions come true, will command 40% of global refining capacity in the next five years; and it is already creating a glut on the Asian diesel market, pushing the fuel prices down.
The Chinese will hardly encourage the Russian state company’s participation in these plans of regional and global expansion. Moreover, they are apparently concerned about a project of Rosneft in the Far East, a large refinery and petrochemical facility on the Pacific coast. Although Chinese companies have been invited to join the Russian downstream project, they have made no practical steps to accept the proposals.
Igor Sechin will perhaps have to choose between two competing projects in Tianjin and in Nakhodka, and find a niche for his company on the Asian fuel market. It is an uphill road for the Russians, given the attitude of their Chinese colleagues.
Mikhail Krutikhin
Published with the kind permission of RusEnergy. Mikhail Krutikhin is with RusEnergy, an independent privately-run company established in 2000 by a group of Russian experts with a long experience in consulting and publishing business. Based in Moscow, it specializes in monitoring, analysis and consulting on oil and gas industry of Russia, Central Asia, Azerbaijan and Ukraine.