As China, Russia relations deepen, what are implications of Essar Oil sale to Rosneft?

On occasions, a columnist should be granted the latitude to engage in what EH Carr referred to as an “idle parlour game”. The game is “idle” because it is removed from reality and played in the arena of speculative conjecture. It has seemingly no practical content. It should, however, be played to prepare for the unexpected. Reality is often built on shifting sands and what is “real” today can metamorphose into but a memory tomorrow. This article will engage in just such a game. It is pegged on a recent business transaction which attracted considerable interest in the Pink press but hardly any commentary elsewhere. The article will look at this transaction through a broader geopolitical lens and recommend that decision-makers note the “idle” speculation that follows the overview.

The business transaction was the recent sale of Essar Oil to the Russian company Rosneft for $13 billion. It made eminent commercial and strategic sense for both parties. Essar was (is) deeply in hock to the banks. It could not service its debt. To stave off bankruptcy, it had to sell its refinery and downstream retail outlets and the Vadinar port attached to the refinery. Rosneft, Russia’s largest integrated oil and gas company, on the other hand, saw an opportunity to make a “big bang” entry into, as they put it, “one of the fastest growing markets” in the world. And by doing so, secure a captive outlet for their equity crude oil from Venezuela where they have interests in several oil-producing fields. The Venezuelan crude is “heavy” in composition and only sophisticated refineries like the Essar refinery can convert it into high-value refined products like LPG, gasoline and diesel. The deal was blessed by the respective governments and President Vladimir Putin and Prime Minister Narendra Modi were present to witness the exchange of MoUs.

In itself, there is no reason to view this deal through anything but a commercial prism. Rosneft is, however, not any ordinary oil company. It is the largest publicly-traded entity in Russia. It is controlled by the Russian state which owns 50% plus one share of the company. It has a global footprint. Its chairman Igor Sechin is a close confidante of Putin and it is an instrument for pushing Putin’s economic and geopolitical agenda and, in particular, for skirting US sanctions. There are, therefore, compelling reasons to look at the implications of the Rosneft-Essar deal through a broader prism. And when one does so, questions arise, which however far-fetched, deserve contemplation. One example will bring this point into sharper relief.
Earlier last month, Rosneft announced that the Chinese company CEFC China Energy Co Ltd would purchase 14.6% of Rosneft’s shares from the Qatar Investment Authority and the trading company Glencore for a price of around $9 billion.

CEFC is a relatively unknown private energy company but with strong political ties. Its chairman Ye Jianming is reportedly the “princeling” grandson of the legendary Marshal Ye Jianying, one of Mao’s associates on the Long March. Again, prima facie, the deal is a solid commercial transaction driven by strategic logic. China needs to reduce its dependence on oil supplies from the Middle East and the maritime risks of disruption in the Strait of Malacca and South China Sea. Rosneft (Russia), on its part, needs the money. It had, earlier in December 2016, “sold” 19.5% shares to Qatar Investment Authority to manage its budgetary requirements and now, for reasons that are difficult to discern, it needs to shift the ownership. However, like the Russian wooden dolls “matryoshka”, which when opened up reveal an even more elaborate looking doll nesting inside, this deal will also have layers within layers.

One layer is easy to describe. It confirms the deepening energy relations between the two countries. Russia is already, for instance, the largest supplier of crude oil to China, delivering approximately 1.1 million barrels a day. The other layers are more opaque. It is not clear whether CEFC will have a board position and privileged access to information about Rosneft’s strategic plans. Or whether it will be used as a conduit for “back channel” strategic dialogue? These are, however, possibilities that should be factored into any analysis of the deal.

The 19th century British Prime Minister Viscount Palmerston once said, “We have no eternal allies and no perpetual enemies … only eternal and perpetual interests.” We should remember this saying as we engage in the parlour game. For, ultimately, it will be the thread of Russia’s perpetual interests that will drive Rosneft, whether in Venezuela, India or with the Chinese.

So, with this broadening perspective on Rosneft, what are the questions that warrant speculative reflection. I can think of three. One, what if the friend of an enemy becomes our enemy? I use the word “friend” and “enemy” loosely simply to tie together three developments—the deepening energy bonhomie between Russia and China; China’s doctrine of “string of pearls” (for example, it has leased the Sri Lankan port of Hambantota and will develop the Pakistani port of Gwadar); and Russia’s ownership of the port of Vadinar.

Two, given Rosneft’s direct and indirect (via China) involvement with Iran, Pakistan and India, could it be persuaded to broker the resurrection of the economically compelling Iran-Pakistan-India gas pipeline, and if one pushed the envelope to the extreme of abstraction, the creation of an Asia Pacific energy infrastructure linking Central Asia-Iran-Pakistan-India-South East Asia and China? And three, how can India protect its “perpetual” interests in the event Rosneft gets sucked into a geopolitical imbroglio involving America.

For, Russia and the Rosneft chairman have been sanctioned by America; Rosneft has strategic assets in Venezuela which is blacklisted by Donald Trump; and if Harvard professor Graham Allison’s thesis in his book “Destined for War: Can America and China Escape Thucydides’s Trap?” is right, China and America are headed potentially (not inevitably) towards conflict. More questions could be asked, but the game should begin with at least these three.