Russia is reportedly considering a major oil-sector shakeup by merging three of its largest oil companies: state-backed Rosneft and Gazprom Neft (the country’s third-largest producer) and privately-held Lukoil. All three companies currently face US sanctions.

According to a Wall Street Journal report, Russian officials and executives have discussed merging these oil giants into a single producer, underscoring Putin’s intent to mobilize the energy sector in support of his war effort, sources familiar with the discussions said.

A Game-Changing Merger In The Oil Sector
If the merger proceeds, it would create a production powerhouse second only to Saudi Aramco, with output nearly triple that of ExxonMobil – the U.S. oil giant.

The consolidation would significantly strengthen President Vladimir Putin’s control over global energy markets and bolster Russia’s war-driven economy.

The potential deal has drawn the attention of global stakeholders, including Saudi Arabia, India, China, and the United States, all closely monitoring Russia’s next move.

Notably, the consolidation could allow Russia to command higher prices for crude oil exports to major buyers like India and China.

A Bid To Weaken Russia’s War Chest
The US and UK have effectively banned Russian oil and natural gas. In December 2022, the European Union and G7 imposed a price cap and embargo on Russian crude oil, aiming to deprive the Kremlin of vital funding for its invasion of Ukraine. The cap prohibits Western companies from transporting or insuring Russian oil sold above US$60 per barrel, while the embargo bars nearly all EU imports of Russian oil.

However, no restrictions were placed on refined oil derived from Russian crude, allowing countries outside the sanctions regime to import and refine Russian oil and then export refined products to the price-cap coalition countries.

India’s Strategic Pivot To Russian Oil
Since the war began, India has emerged as the second-largest importer of Russian oil. Before the conflict, Russia accounted for less than 1% of India’s total oil imports; that share has now surged to nearly 40%.

This shift is driven by Russia’s substantial discounts on crude oil, which have made it attractive to nations like India, as Western sanctions on Russian exports have made its oil more affordable.

India’s refinery sector has capitalized on the situation, with a notable increase in fuel exports to the EU. In the first three quarters of 2024, India’s oil products exports to Europe rose by 58%, much of it likely refined from discounted Russian oil.

A recent report from the Centre for Research on Energy and Clean Air (CREA) highlights that India has become the EU’s top supplier of oil products, much of it from refineries like Jamnagar and Vadinar (Reliance Industries and Rosneft-backed Nayara Energy), and Mangalore Refinery and Petrochemicals Ltd (MRPL).

CREA points out that continued EU imports of refined products sustain Russia’s crude exports to non-sanctioning countries, ultimately strengthening Russia’s revenue.

China-Russia Strategic Trade
Similarly, China has restructured its crude oil imports, with Russian oil playing an increasingly significant role.

According to a CREA report, from December 5, 2022, to October 2024, China accounted for 46% of Russia’s coal exports, followed by India (17%), Turkey (10%), South Korea (10%), and Taiwan (5%), rounding out the top five buyers.

In response to European sanctions after the Russian invasion of Ukraine, Russia has shifted some of its crude oil exports to new markets, particularly China.

China capitalized on Russia’s oil discounts, securing large volumes of bargain-priced crude amid Western sanctions. In 2023, China purchased 45-50% of Russia’s oil and fuel exports, benefiting from below-market prices due to the oil price cap. This shift has significantly lowered China’s energy costs.

According to an Institute for the Study of War (ISW) report, Gazprom, the parent company of Gazprom Neft, has faced significant revenue losses due to a decline in energy sales since Russia’s full-scale invasion of Ukraine in 2022. In early 2024, Gazprom CEO Alexey Miller reportedly failed to secure a deal with China over the Power of Siberia-2 (PS-2) gas pipeline due to disagreements.

In his November 7 Valdai Club address, President Putin emphasized that Russia is willing to sell oil, gas, and nuclear energy to China to offset the country’s energy shortages caused by Western sanctions.

The ISW suggests that the Kremlin may seek to consolidate its influence in the global energy market to secure more favorable energy deals, particularly with China, amid declining revenues from international exports and rising federal national security and defense expenditures.

The Kremlin’s Push For Global Energy Dominance
Oil and gas are the cornerstone of Russia’s economy, contributing nearly a third of federal revenue and providing President Putin with significant global influence. The country’s ability to stabilize its economy amidst Western sanctions has largely become possible due to its oil industry.

According to a WSJ report, Igor Sechin, head of Rosneft and a close ally of Putin, is a key figure in the ongoing talks regarding a potential merger of Russia’s top oil companies. The aim could be to secure higher prices for Russian oil from major buyers like India and China.

However, sources have suggested that the proposed merger of Rosneft, Gazprom Neft, and Lukoil is still in flux, and it remains uncertain if Sechin will lead the combined entity.

Representatives from the Kremlin, Gazprom Neft, Lukoil, and Rosneft have all denied that merger talks are taking place. A Lukoil spokesperson stated that neither the company nor its shareholders were engaged in any merger discussions, as such a move would not align with the company’s interests. A Kremlin spokesperson also said that Moscow had no knowledge of the deal.

Challenges To The Mega-Merger
While the Russian president envisions the merger of three oil giants as a powerful force to rival Saudi Arabia’s Aramco, many challenges remain.

Supporters argue that a combined entity could yield significant profits. Still, critics warn that the immense power held by the leaders of these companies could lead to excessive concentration of authority.

Experts point out that such a reorganization could undermine the balance of power within Russia’s oil sector.

Other key issues include opposition from company executives and the difficulty of raising funds to pay out Lukoil shareholders, as reported by The Moscow Times.

Will Russia’s Dominance Drive Up Oil Prices?
Ultimately, Russia’s efforts to consolidate its oil industry reflect the Kremlin’s determination to mobilize the energy sector to support its geopolitical ambitions. As Russia moves forward with plans to merge its top oil companies into a production powerhouse, the potential consequences for global energy markets are significant.

This merger could enable Russia to control a larger share of the global oil supply, potentially granting Moscow greater leverage to command higher prices.

In conclusion, while the proposed merger remains uncertain, its implications are clear: Russia is positioning itself for greater control over the global oil market, and nations like India and China may soon face higher costs for their Russian crude imports.