Saudi Arabia is looking at unprecedented deals to acquire oil and gas assets in Russia, deepening ties between the world’s largest energy exporters as the Saudi king prepares to visit Moscow later this week.
OPEC’s biggest crude producer is considering investing in Russia’s largest oil drilling contractor, Eurasia Drilling, and Novatek’s proposed Arctic LNG 2, according to officials with knowledge of talks, who asked not to be identified because the talks are private. While discussions are at an early stage, some framework accords could be signed during King Salman bin Abdulaziz’s trip, one of the officials said. Saudi Arabia and Russia produce almost a quarter of the world’s oil between them and led an historic agreement between OPEC and other major suppliers last year to cut output and help end a global glut of crude. Direct Saudi investment in Russian assets would show continued commitment to cooperation between the two energy superpowers as King Salman and Russian President Vladimir Putin prepare for talks that are likely to include whether to extend the pact on oil production limits.
The Saudi-Russian rapprochement marks a policy change between two unlikely partners. Saudi Arabia is historically a staunch ally of the U.S., Russia’s longtime adversary and the main partner in the discovery and production of the kingdom’s crude. The recent boom in U.S. shale production proved a turning point, with Saudis and Russians recognizing a shared interest in defending against this contributor to a global supply glut and working closely together to reach the cuts accord. While Saudi-U.S. relations have improved under President Donald Trump, the OPEC kingpin appears to be hedging its bets by building closer ties with Russia, which has emerged as a major power in the Middle East over the past few years. King Salman is scheduled to meet Vladimir Putin in Moscow on Thursday, while a delegation traveling with him, including Saudi Arabian Energy Minister Khalid Al-Falih, will participate in an investment forum the same day. Final agreements are subject to due diligence and are establishing that the deals don’t violate any international sanctions against Russia, one official said. Investments with Eurasia and Novatek aren’t the only deals on the table. Saudi Arabian Oil, or Aramco, is in talks with Sibur Holding, Russia’s largest petrochemical producer, about forming a joint venture to make synthetic rubber in the desert kingdom, two people with knowledge of the discussions said last month.
Saudi Energy Minister Al-Falih told reporters during his first OPEC meeting last summer that Saudi Aramco will consider investing in upstream projects abroad after the company goes public, focusing mainly on developing natural gas. He didn’t rule out importing gas into the kingdom. The state-run giant plans to sell shares to investors by the end of 2018. Saudi investment in Russian gas production would mirror an earlier, unsuccessful joint venture when Lukoil spent more than a decade fruitlessly trying to develop gas deposits in Saudi Arabia’s barren Empty Quarter. Novatek, which aims to launch its first liquefied natural gas plant in the Arctic in November, is planning the second project to follow in 2022 or 2023, making it Russia’s biggest LNG producer. The company will select potential partners for the development closer to the final investment decision, expected by 2019, its billionaire chief executive Leonid Mikhelson said in July.
Both countries can gain from a gas venture, Mazen Al-Sudairi, the head of research at Riyadh-based Al Rajhi Capital, said by phone. The Russians need to export LNG to a big consumer, and Saudi Arabia needs gas to expand its petrochemical industry and cut use of crude to generate power, he said. “This doesn’t mean that there are no risks” for the Saudis, Al-Sudairi said, noting the political uncertainties of doing business with Russian companies and the volatility of the ruble. Eurasia, which has around 20% of the Russian oil-drilling market, in June agreed “on investments” from China and the Middle East, led by the state-run Russian Direct Investment Fund. The partners didn’t disclose any details. By investing in Eurasia, the Saudis could bring the company to work in the kingdom and help lower the cost of drilling and production for Aramco, Al Rajhi Capital’s Al-Sudairi said.
Eurasia’s principal shareholders have also agreed to sell 51% to Schlumberger. This acquisition is due to be approved by Russia’s regulators, who are demanding guarantees from the world’s largest oilfield-services provider that all Eurasia’s contracts will be met even if U.S. and its allies expand sanctions against Russia.
Source: Wael Mahdi, Elena Mazneva and Ilya Arkhipov for Bloomberg