Author : Prithvi Gupta

Expert Speak Young Voices
Published on Feb 22, 2023

The Sino-Russian bilateral signifies China’s urgency for resilient global energy supply chains to meet its increasing energy needs through its oil-for-loans policy.

Oil-for-loans: Chinese energy investments in Russia

China’s consistent economic growth, driven by wide-ranging capital investments and a thriving manufacturing sector, has made it the world’s largest energy consumer. Consequently, Beijing has found a reliable trade partner for energy commodities such as oil, gas, and coal in fossil fuel-rich neighbouring Russia. This relationship’s mutual affinity and security issues have been discussed and examined in recent years. The Ukrainian war and the subsequent Western sanctions on Russia have further driven Russian interests eastwards towards China and India. This article analyses Russia’s energy sector and illustrates an array of Chinese acquisitions in Russian oil and gas companies financed by China’s state-owned banks and companies.

< style="color: #163449">A reliable partnership between the Russian state energy complex and China 

China became a net oil importer post-1992. China consumed 14.13 million barrels daily in 2021, 14 percent more than the International Energy Agency’s 2015 forecast of 9.5 million. The periods of intense economic growth in 2002-03 and 2007-09 further accelerated its oil demand. To overcome China’s exacerbated strategic and economic vulnerabilities caused by ever-growing imports, Beijing devised a “loans-for-oil” policy and equity investments (with a buyback option in exchange for oil imports) to create resilient and diversified energy supply chains. 

The era of strategic cooperation between state-owned Russian energy companies and Chinese national oil companies, especially between Rosneft and China National Petroleum Corporation (CNPC), began in 2004 following the “Yukos affair”. Yukos, one of Russia’s biggest private oil and gas suppliers, was driven to bankruptcy following tax fraud allegations, allowing China to up its ante. CNPC facilitated Rosneft’s acquisition of Yukos’ subsidiary, Yuganskneftegaz, a major oil producer, by allowing Rosneft to buy back controlling shares from CNPC. In return, China earned a sustained oil supply of 49 million tonnes annually. 

Table 1: Chinese Stakes in Russia’s State Oil and Gas Companies 

S. No. Year Investor Transactional party Quantity in Millions ($) Share size in percentages
1. 2006 China National Petroleum Corp. (CNPC) Rosneft 500 0.62
2. 2009 China Investment Corporation (CIC) Nobel Holdings 300 45
3. 2010 China Huadian Corporation (CHC) JSC Territorial 360 51
4. 2011 Three Gorges EuroSibEnergo 2290 50
5. CHC TGC-S 590 100
6. 2013 State Grid Sintez 1140 N/A
7. 2013 Shenhua En+ 460 50
8. 2014 CNPC Rosneft 990 10
9. 2014 Power Construction Corporation (Power China) RusHydro 1460 49
10. 2014 CNPC Novatek 940 20
11. 2015 State Administration of Foreign Exchange (SAFE) Novatek 1210 10
12. 2015 China Petroleum and Chemical (Sinopec) Sibur 1340 10
13. 2016 SAFE Sibur 1150 10
14. 2016 CEFC China Energy EN+ 500 N/A
15. 2017 CIC Eurasia Drilling 100 6
16. 2019 CNPC Rosneft 9100 18

Source: Oxford Energy, Russian Government data, Chinese Government data, Reuters 

A rough calculation of its investments in Russia between 2005 to 2021 reveals that Chinese state companies have invested a staggering US$ 95 billion in energy infrastructure while also investing US$ 48 billion in acquiring stakes in Russian state oil and gas companies.

Table 2: China-funded Energy Infrastructure Projects in Russia

S. No. Subsector Project Contractor Chinese investments in US$ Year
1 Gas Amur gas processing plant (GPP)* China Petroleum Engineering & Construction (CPECC)*  12,700 2015
2 Gas Power of Siberia Gas Pipeline China National Petroleum Corporation (CNPC) N/A 2019
3 Gas Ust-Luga Gas and Chemical Complex* China National Chemical Engineering (CNCE)*  13,300 2019
4 Gas Amur Gas Chemical Complex (40% stake) CNPC  11,600 2019
5 Gas Yamal LNG Export Facility (20% + 10% stake) China National Offshore Oil Corporation (CNOOC), Silk Road Fund (SRF)  5,900 2017
6 Gas Arctic-2 Liquefied Natural Gas Project (20% stake) CNPC, CNOOC  4,040 2020
7 Gas Chayandinskoye LNG plant (10% stake) CNCE  1,170 2019
8 Gas Process modules (Arctic LNG-2)* Bomsec OffShore Engineering*  520 2019
9 Oil Eastern Siberia Pacific Ocean Pipeline* CNPC*  25,000 2009

Source: Oxford Energy, Russian Government data, Chinese Government data, Reuters; *fully funded by China

Chinese financial interventions strategically reallocated and built assets crucial to Russia's energy economy, helping Russia consolidate its “Pivot to Asia” policy. Political will at the highest rungs of both governments, Beijing’s vast financial resources, Russia’s “Look East” policy, Western sanctions of 2014 and subsequent alienation reinforced this partnership.

< style="color: #163449">Oil-for-Loans 

The Eastern Siberia Pacific Ocean Pipeline (ESPO) project, crucial to oil transit between the two nations, highlights China’s “oil-for-loans” policy. ESPO provided Beijing with a land-based route for China’s energy trade and was thus most critical in ensuring China’s energy supply stability. Russian President Vladimir Putin termed the trade deal worth US$ 25 billion as the “Gateway to the East”.

CNPC funded ESPO in exchange for delivering 15 million tonnes of oil annually to China till 2030. Rosneft and Transneft agreed to a daily supply 0.18 million barrels and 0.12 million barrels. China Development Bank (CDB) facilitated the loan to the Russian energy giants at CNPC’s behest. CDB held the authority to deduct money directly from these accounts to ensure timely repayments. If a default occurred, CDB could withdraw the entire funds from the accounts.

< style="color: #0069a6">ESPO provided Beijing with a land-based route for China’s energy trade and was thus most critical in ensuring China’s energy supply stability.

CNPC accounts for the bulk of imports from the ESPO; China National Chemical Corporation (ChemChina), Sinochem Group and China National Offshore Oil Corporation (CNOOC) are the other major buyers. Russia’s Rosneft still accounts for 40 percent of the total ESPO exports. Yet, players like SurgutNG account for roughly 27 percent of the ESPO crude going to China and other recipients, including Japan and South Korea.

This energy axis also helped the partners de-dollarise bilateral trade, as China agreed to pay in Rubles and Yuan from September 2022.

< style="color: #163449">Weathering Western sanctions of 2014

The Sino-Russian bilateral relations go beyond commerce and trade. As Western sanctions, imposed after Russia’s annexation of Crimea in 2014, began taking a toll on the Russian economy, President Putin and President Xi struck a deal that would cushion the sanctions’ blows, leading to separate deals between CNPC and Rosneft, Novatek and China Petroleum and Chemical Corporation (Sinopec) and  Rosneft, Sibur.

However, this was different in the financial sector. As major Chinese banks complied with the Western sanctions, Russia missed out on potential foreign investments worth US$ 471 billion. To circumvent the sanctions, some Chinese banks facilitated aid to Russia through CDB, Silk Road Fund (SRF), and Chinese state companies – all less connected to the global economy, thereby suited to undertake riskier investments. A case in point is SRF’s financial assistance to Novatek in December 2015 and the subsequent purchase of 10 percent stakes in the Yamal LNG project. In April 2016, CDB extended a US$ 10-billion loan for the same project. Sinopec reportedly paid US$ 15 billion in prepayment for gas imports to stabilise Rosneft’s financial position. Sinopec and ChemChina also bought controlling stakes in Rosneft following its privatisation in 2014.

< style="color: #0069a6">To circumvent the sanctions, some Chinese banks facilitated aid to Russia through CDB, Silk Road Fund (SRF), and Chinese state companies – all less connected to the global economy, thereby suited to undertake riskier investments.

< style="color: #163449">Conclusion

Between 2014 and 2019, Putin and Xi met 30 times, emphasising the resilience and growth of the Sino-Russian energy relations. In November 2022, at the fourth China-Russia Energy Business Forum, Xi labelled the energy partnership as the bilateral’s cornerstone. The growing convergence, convenience, and alignment of energy interests have made the Sino-Russian bilateral relations the most amicable in their history. China is financing energy infrastructure across the global energy economy to create resilient supply chains for itself. But, with energy transition and grid decarbonisation gaining prominence, how long will such fossil-fuel friendships remain relevant is the million-dollar question.

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Prithvi Gupta

Prithvi Gupta

Prithvi works as a Junior Fellow in the Strategic Studies Programme. His research primarily focuses on analysing the geoeconomic and strategic trends in international relations. ...

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