Eric Watkins
Oil Diplomacy Editor
LOS ANGELES, Oct. 29 -- Russia's state-owned OAO Transneft and China National Petroleum Corp. have signed a landmark agreement calling for the construction of a 67-km, 300,000 b/d pipeline spur from the East Siberian Pacific Ocean pipeline.
The agreement came after talks between Chinese Prime Minister Wen Jiabao and Russian Prime Minister Vladimir Putin, and it is to be seen as part of a broader effort at cooperation between the two countries on energy.
"We should deepen cooperation in the energy sphere," Wen said, ahead of his talks with Putin. "Long-term cooperation [on energy] will help economic development and stability on world markets," he said.
"We have to aim for real results," said Zhang Guobao, China's top energy official. "We've discussed this for many years but the results do not correspond to what they should be for two neighboring powers," said Zhang.
"We need to build oil and gas pipelines, increase downstream and upstream cooperation, and increase cooperation in the nuclear sphere," said Zhang.
According to analyst Global Insight, the pipeline spur agreement binds Russia and China tighter economically and marks "a significant step forward in their blueprint to increase their energy cooperation."
The long-awaited agreement about construction of the spur coincided with an announcement by Russian Deputy Prime Minister Igor Sechin that the Chinese government will provide Russian oil firms with "considerable" loans in return for increased oil supplies.
"Financing is required to realize major projects," said Sechin, who added, "The sum of the loans will be determined by the projects."
Sechin's remarks underline a condition the Russians have long insisted on, claiming that the pipeline would not be commercially viable unless new oil fields are developed to supply it.
Sechin did not detail the amount of the loans on offer from the Chinese, saying that Russian and Chinese energy companies would submit a proposal for cooperation by Nov. 25.
"It's still early to speak of the credit agreement but work will be spread over production, refining, sales, and transportation," Sechin said.
However, industry sources said the two countries were in talks to secure $20-25 billion in Chinese loans in exchange for greater supplies of Russian oil.
Such a deal would give the Chinese access to some 300 million tonnes of Russian oil over the next 20 years. That comes to 15 million tpy, which is precisely the capacity of the pipeline spur.
"For the Chinese, it is about securing a strategically vital land route for oil imports, while for the Russians it is about the money," Alfa Bank analysts said in a note.
The pipeline spur, which will cost an estimated $800 million, will branch off the ESPO pipeline at the Russian town of Skovorodino and run to the Chinese border. There, it will join the Chinese pipeline network to reach the oil hub of Daqing in northern China.
"Transneft has prepared blueprints for the spur, whose technical details are in the phase of being agreed with the Chinese side," Sechin said earlier this week, ahead of meetings with Chinese energy officials.
The ESPO is being built in two phases and aims at exporting Russian crude oil to the Asia-Pacific region.
Phase one involves construction of a 30 million tpy oil pipeline from Taishet to Skovorodino. Phase two will see construction extended from Skovorodino to the port of Kozmino on Russia's Pacific Coast, increasing capacity to 80 million tpy.
Until the completion of Phase 2, oil will be delivered by pipeline from Taishet to Skovorodino and then by rail from Skovorodino to Kozmino where an export terminal is already under construction.
Earlier this month, Russian Energy Minister Sergei Shmatko, while acknowledging a new agreement to sell oil to China, stated that the projected ESPO pipeline spur sought by the Chinese would not be ready before 2009 (OGJ Online, Oct. 23, 2008).
Contact Eric Watkins at [email protected].
