Japan increasingly buying its oil from Russia
Russia and Japan are becoming increasingly close energy partners, a trend that Igor Sechin, CEO of Rosneft (ticker: RNFTF) believes will continue into the future. Sechin said today that Russia’s oil exports to Japan rose 20% year-on-year in January-August 2015 despite a mutual decline in trade, Sechin said during a Russia-Japan energy cooperation conference in Tokyo, reports TASS.
“The potential of export from Russia to the Asia-Pacific Region can be estimated at over 300 billion cubic meters of gas a year,” Sechin said. “Total gas reserves in the mainland part of the Eastern Russia equal 8.7 trillion cubic meters and the resource potential is over 33 trillion cubic meters,” Rosneft CEO said.
Rosneft’s CEO believes that the company will supply a total of 4.2 million tons (about 31 million barrels) of crude oil by the end of this year. “We’re facing positive dynamics. Three years ago we supplied around 3.2 mln tonnes per year while this year our supplies will be one million more – around 4.2. Plus another 1.4 mln tonnes of oil products,” Sechin said.
Russia ready to supply all of Japan’s LNG needs too
Sechin added that, in addition to crude oil, Russia could also supply all of Japan’s demand for LNG, and that he hopes to see increased cooperation between the two nations on energy projects in the future.
“Gas resources are available and we are ready to satisfy all Japan’s gas demands on the account of our resources,” Sechin said. “Certainly, this will require construction of relevant infrastructure and investments into production,” he added. There is a need to set up “vertically integrated chains where all partners will understand their role, investment performance, and where everything will be transparent,” Rosneft CEO said.
Despite his call for greater infrastructure between the two countries, Sechin claims that no additional financing will be required from Japanese banks. “We do not hold any special negotiations on additional loan facilities with Japanese banks; we simply do not need them,” Sechin said. “Cash liquidity of the company makes possible to implement investment programs on a going basis without bringing extra resources. However, I do not rule out we will pursue such activities if Japan’s companies take part in new production projects,” Sechin added.
Rosneft’s debt burden could make new projects difficult
Rosneft’s debt burden could make implementing more projects difficult, however. In 2015, more than $20 billion of debt became due for Russia’s largest oil producer, Dr. James Henderson, an expert on the Russian oil and gas industry, told Oil & Gas 360®.
“Rosneft has a [LNG} project which it wants to push on the Sakhalin Islands. That project has really been put on the back burner, again because of the financial sanctions on Rosneft, but also because of the market conditions in the LNG market,” Henderson said.
Dr. Tatiana Mitrova, Henderson’s co-author in a study on Russia’s gas industry, also told Oil & Gas 360® that while the companies have the financial strength to carry on current operations, developing new projects without financing would be extremely difficult.
“The Russian financial market is very weak and undeveloped. It is not able to provide sufficient financing for all the investment needs of the Russian energy sector,” said Mitrova. “At the moment, [Russian oil and gas companies] can afford functioning just using their own financing, but you can understand, in the modern world, developing any investment projects, developing anything, without attracting loans is a very unsustainable model.”
Sechin said during the conference that Russian projects would offer returns of up to 16%, which he hoped would attract more interest from the Japanese. “We hope, as our Japan’s colleagues already noted, the discussion stage will end and we will begin the implementation stage, proving feasibility and efficiency of our cooperation,” the Rosneft CEO said.
Rosneft offers cooperation in more than 10 projects
“Rosneft is currently ready to offer more than ten production projects at different preparation stages to Japan’s partners, from exploration stage to commercial development stage,” Sechin said. “Rosneft now offers production projects with reserves totaling 6 billion barrels and the resource base of 100 billion barrels of oil equivalent,” Sechin said.
All these projects “have unique features,” Rosneft CEO said. “They “are sophisticated in terms of taxation and are absolutely competitive on the global market by this parameter,” Sechin said. “Our projects are offered on standardized and tested terms of accession to capital; that is, they do not require any special political and administrative examination,” he added.
At the same time, despite the fact that “Japan’s colleagues are familiar with the majority of projects offered by Rosneft and numerous talks were held in respect of them, the result is fairly modest,” Sechin said. “We are still at the discussion stage,” he said adding that “Chinese and Indian partners already participate in such projects.”
Sechin went on to say that he also hopes that Japanese partners will take part in Russia’s shipbuilding industry as well.
“Japan’s shipbuilding corporations, despite their traditional self-restraint in terms of overseas expansions, invested fairly actively during the last decade into shipyards in China, Vietnam, Brazil and Philippines,” Sechin said. “Japan’s shipbuilders, such as Mitsui Engineering & Shipbuilding, Sumitomo Heavy Industries, and Kawasaki Shipbuilding, and marine equipment producers have an opportunity at present to take part in Russian shipbuilding projects, primarily in Zvezda Shipyard,” Sechin said. Rosneft and other major customers already signed agreements on centralized placement of their orders in the said shipyard, he added.
“According to the conclusion of the Russian Ministry of Industry, the potential portfolio of orders for this facility will be about 1,400 vessels of various purpose and marine equipment by 2030,” Rosneft CEO said.
Weary of investment in Russia
Russia’s pivot towards Asian markets has come largely as it looks for friendlier partnerships as relationships with its traditional market in Europe sour. Several experts have told Oil & Gas 360® that the pivot to new markets will likely be smaller than what Russia hopes to see.
Chinese markets have been weary of investing too heavily in the Russian energy sector, despite talks of cooperation.
“There were a lot of statements, and memorandums signed, and talks about cooperation and friendship among Russia and China during this time, so in terms of rhetoric, everything is fine. When it comes to financing, to the real provision of the money, I would say it’s not very inspiring,” said Mitrova.
Whether or not Russia will be able to attract more interest from Japan remains to be seen, but if the Japanese decide to take cues from China, Russia may have a hard time developing new cooperation with the island nation.