China, Russia sign pipeline agreement

Russia's No. 2 oil company has teamed up with Russian national oil pipeline monopoly Transneft and Chinese oil giant China National United Oil Corp., or Chinaoil, to construct a pipeline that will ship 30 million tonnes/year of crude from Russia to China by 2010. China and Russia have provisionally agreed to start building the line in 2003, with start-up scheduled for 2005.


Yukos says its plans to build an ambitious $1.7 billion pipeline to China are moving forward.

Russia's No. 2 oil company has teamed up with Russian national oil pipeline monopoly Transneft and Chinese oil giant China National United Oil Corp., or Chinaoil, to construct a pipeline that will ship 30 million tonnes/year of crude from Russia to China by 2010. China and Russia have provisionally agreed to start building the line in 2003, with start-up scheduled for 2005.

The pipeline agreement was signed by Russia's Minister of Fuel and Energy, Victor Kalyuzhnyi, and China's Minister of the State Planning Development Commission (SPDC), Zeng Peiyan, during the former's visit to China in late March. A due-diligence report and financing matters will be sorted out by first half 2001.

The pipeline is scheduled for completion in 2005 and will be designed to transport oil from Siberia to China.

Yukos will supply the initial 20 million tonnes/year of crude for the pipeline from its oil fields in West Siberia. Throughput will be expanded to 30 million tonnes/year by 2010, when oil fields at Angarsk come on stream.

About 1,630 km of the pipeline will be built in Russia at a cost of $950 million, while the remainder will be built in China at a cost of $650 million.

China and Russia still haven't agreed on the routing of the pipeline, which will start in the Angarsk oil fields in East Siberia. Under a preliminary proposal signed by the Chinese and Russian sides, the pipeline would stretch 2,330 km from Angarsk, cross Mongolia, and terminate in Beijing. A second possibility would be a 2,500-km pipeline through northeastern China.

The Russian side wants to cut the pipeline's distance by having it traverse Mongolia, while the Chinese would like for it to circumvent Mongolia for security reasons.

"The final option for the route of the oil pipeline will be chosen after the [financing] is decided," said Yukos.

China National Petroleum Corp. will represent China to spearhead the pipeline's construction. CNPC has completed the prefeasibility study and will soon submit the project proposal to SDPC for approval.

China's oil imports

Meanwhile, Yukos is already shipping crude to China by railroad. The oil company has signed deals with China to supply 1 million tonnes/year of crude in 2000 and is drawing up agreements with Chinaoil and Chinese oil major Sinopec for deliveries of 500,000 tonnes.

Yukos officials said the pipeline's importance is underlined by the tremendous potential of the Chinese market. China imported 35 million tonnes of crude in 1999 and is expected to need at least 50 million tonnes this year. Total deliveries on the Chinese market in 2000 will be 210 million tonnes, according to the state's economic plan. Yukos forecasts that China's crude imports will reach 75 million tonnes in 2005.

Oil analysts have praised the Russia-China pipeline project, because Russia has long needed additional export routes, and China is a fast-growing market waiting to be tapped. Russia exports about 130 million tonnes/year of oil.

"China is a growing market, definitely, for both oil and gas," said Erik Wigertz, oil analyst at Brunswick Warburg. "Meanwhile, the Chinese oil companies have faced a problem with increasing production at the rates that China will need in the future. So I think Yukos, if they build this pipeline, may have found a very good market."

The China project would probably not have too much difficulty finding investors if Yukos decides to form a consortium, said Steven Dashevsky, oil analyst at the Aton brokerage. "If oil prices remain above $20/bbl...I think there should be enough cash flow and the ability to attract outside funds to finance this project," Dashevsky said.

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