China National Petroleum Corporation is ready to buy a stake in Russia’s biggest oil company, Rosneft, but is demanding an opportunity to run it.

Previously, Rosneft preferred to work with Indian partners because of the Chinese side’s intractability. Photo: Reuters

China National Petroleum Corporation (CNPC) is interested in buying a stake in state-owned Russian oil major Rosneft, provided it gets an opportunity to take part in running the company, CNPC chairman of the board Wang Yilin told the Rossiya 24 news channel.

Yilin said the format of participation and the scope of powers will be reflected in Rosneft’s proposal, which the Chinese side will study very closely.

Previously, largely because of the Chinese side’s intractability, Rosneft preferred to work with Indian partners. In particular, in March 2016 the Russian company sold a share in a large East Siberia oilfield to India’s Oil and Natural Gas Corporation Limited (ONGC).

Also read: What you need to know about Rosneft

Fight for control

By the end of 2016, the Russian government plans to privatize 19.5 percent of Rosneft. As of early June 2016, the value of this block of shares was estimated at 664 billion rubles (about $10 billion) on the Moscow stock exchange.

Without this deal, it would be impossible to implement this year’s federal budget with a 3-percent deficit, Economic Development Minister Alexei Ulyukayev said in late May.

The government hopes to sell the whole stake to a single buyer and CNPC could become that strategic partner. The Chinese company has already acquired 0.62 percent of shares in the Russian oil giant for $500 million, during Rosneft’s IPO in the summer of 2006.

When CNPC speaks of taking part in running the company, it means representation on Rosneft’s board of directors, says Robert Novak, a senior researcher with MFX Broker. According to him, the Chinese side could get two seats on the Rosneft board of directors.

The board consists of nine people, including two representing British Petroleum, which owns 19.75 percent in the Russian company. Since 2013, the Rosneft board has been unable to put forward key issues to the company’s shareholders’ meeting without the approval of the BP representatives.

The British co-owners are yet to approve both the sale of a stake in the company to a strategic investor and that investor’s participation on the company’s board. If the deal goes through, Russia will retain five seats on the Rosneft board of directors, with four belonging to foreign investors.

However, it has been suggested that the Chinese side may want to get more than two seats on the board, which may mean that Russia will lose control over the company.

“If the Chinese company expects a bigger representation, given its investment capabilities, to give it extended powers in running the company would require signing a separate shareholder agreement with it,” said Alexei Kalachev, an analyst with investment company Finam.

Legally it is possible, he added, but it should not be forgotten that Rosneft is on the special list of strategic state companies.

Yukos all over again?

But could the state do with Rosneft what it once accused Mikhail Khodorkovsky of trying to do with the now-defunct oil giant Yukos?

The situation around Rosneft is indeed in some ways similar to the events of 2003, says IFC Financial Center vice-president Stanislav Verner. The thing is that the bulk of Rosneft’s oil production assets come from the Yukos oil company, whose former owners now accuse Russia of deliberately bankrupting the company.

In 2003, Yukos was in talks about selling a blocking stake to the U.S. companies Chevron and ExxonMobil. However, the plan to sell oil assets to a foreign investor was met with resistance at state level. Later, Yukos’ owners were accused of tax crimes and the company was liquidated. Yukos’s main owner Mikhail Khodorkovsky ended up spending some 10 years in prison on what were widely seen as fabricated charges.

“I would not compare the current deal to the Yukos project,” said Alexei Kalachev. “The latter would have resulted in the creation of the world’s biggest oil company, whereas with this deal the budget is just trying to raise additional funds,” he said, adding that in this case both the circumstances and the goals are different.

This article first appeared in Russia Beyond the Headlines