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Russian oil and gas contracts to benefit from China energy deals -- report

Major oil and gas deals signed over the past 15 months between Russia's oil major Rosneft, gas giant Gazprom and independent gas producer Novatek and China's CNPC will be credit positive for the Russian companies, international rating agency Moody's said in a report Tuesday.

The deals will provide them with opportunities for growth and access to new sources of funding, with the potential to expand these relations in the future. They will also reduce Russia's heavy reliance on European energy markets where the country is exposed to sanctions and competitive risks.

"Russia's efforts to diversify its energy exports, are aligned with China's desire to secure new oil and gas supplies to meet its large and fast-growing energy needs," says Julia Pribytkova, Moody's Vice President, Senior Analyst and author of the report.

"Gazprom's deal, which is valued at $400 billion, will also provide a launch pad for the company's full-scale diversification into the Asia-Pacific region at a time when it is facing sales pressure in Europe," Pribytkova added.

In its report, Moody's notes that China's GDP growth rate, although slowing, is still anticipated to be much higher than Europe's, where demand for Russian natural gas remains subdued in the wake of the 2009 economic downturn. Russia is well-placed geographically to fill the gap between China's domestic oil and gas production and demand via the development of its vast, largely untapped East Siberian reserves.

In addition, Moody's notes that China is helping to finance the development of Russia's oil and gas industry. Long-term supply contracts with guaranteed offtake volumes, equity deals and access to funding from Chinese financial institutions will facilitate the development of new production and transportation infrastructure required to supply the Chinese market.

This alternative source of financing is particularly important for Rosneft in light of the US sanctions as the company faces the greatest maturities by end-2015 in the sector, which it expects to cover in part with oil prepayments from its contract with CNPC.

Moody's also projects that Russia's turn eastwards will also have its challenges, as China's ability to put pressure on prices and the sheer scale of the required investments could weigh on the future profitability of Russia's oil and gas sector.

[Source: Itar Tass, Moscow, 02Sep14]

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