The development is loaded with geo-political nuances and is strategically important for China.
As per three sources with direct knowledge of the discussion, CEFC China Energy, is in preliminary talks with Russian state oil giant Rosneft in order to acquire a stake in the company.
The sources did not disclose the financial terms of the deal. As per a source familiar with Rosneft, the Russian giant would be open to selling CEFC a stake in its retail business, which includes nearly 3,000 filling stations, more than 1,000 gasoline tankers and over 150 oil storage complexes.
With strong ties to the Kremlin, Rosneft is Russia’s biggest and most influential oil company. The country has also overthrown Saudi Arabia as China’s biggest oil supplier.
This deal is aimed at fulfilling CEFC’s ambitions on becoming a major international energy merchant and give competition to traders such as Glencore.
Incidentally, CEFC is contracted to store part of China’s strategic oil reserve. The deal will also strengthen this supply chain.
CEFC has been on an acquisition spree, including in overseas market since 2015.
If this deal were to go through, the Russian government, which holds a 50% stake in Rosneft through Rosneftegaz, a holding company, would need to issue a special government decree if it were to lower its stake below 50% in Rosneft. In December, it had sold 19.5% of its stake to Glencore and Qatar Investment Authority (QIA) for more than $11.8 billion (10 billion euros). BP also owns a 19.75% stake in Rosneft.
As per Rosneft’s spokesman, the company saw China as a strategic partner and was cooperating with a wide range of Chinese companies, including CEFC.
“We consider the Chinese market as the most promising and actively developing. The company will increase its cooperation with Chinese partners in all business areas and make public statements accordingly as joint projects are developing,” said the company in an email.
“Rosneft does not hold its shares and, therefore, does not sell its shares.”
If the deal goes ahead, it would make CEFC the first privately held Chinese company to have invested in a major oil giant. Typically, China routes such strategic investments through its three big state-owned oil companies.
This development has a socio-political angle to it: this could be Russia’s way out of the sanctions imposed by the United States and the European Union over its annexation of Crimea. With Rosneft’s CEO being close to Russian President Vladimir Putin, it is the only company that has been sanctioned by both the U.S. and E.U.
These sanctions will be a key concerns for CEFC and could pose financing challenges, said a senior Chinese source familiar with the discussions.
“The company is now engaging lawyers to evaluate thoroughly the legal hurdles sanctions may bring about,” said the person while adding that it was too soon to discuss valuations.
As per another source, CEFC has assigned a task force of nearly 40 people to work on this investment.
The two companies could potentially announce a deal next month when senior Russian officials are slated visit Beijing.
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