Russians, Chinese suspend talks on ESPO spur

Russia and China, apparently backtracking on agreements made less than a month ago, have suspended talks on the construction of the proposed spur from the ESPO pipeline.

Eric Watkins
Oil Diplomacy Editor

LOS ANGELES, Nov. 13 -- Russia and China, apparently backtracking on agreements made less than a month ago, have suspended talks on the construction of the proposed spur from the East Siberia-Pacific Ocean pipeline.

"The activity of working groups has been suspended," said spokesman Igor Demin of Russia's pipeline monopoly OAO Transneft.

The Russian and Chinese signed a memorandum of understanding on the construction and supply of the line in late October during a meeting between Russian Prime Minister Vladimir Putin and his Chinese counterpart Premier Wen Jiabao.

Under terms of that MOU, China was to grant $15 billion in loans to Russia's OAO Rosneft and $10 billion to Transneft for construction of the pipeline spur and for the supply of 15 million tonnes/year of oil over 20 years.

The branch pipeline was planned to extend some 70 km from Skovorodino in Siberia to the Chinese border and was to supply the oil hub of Daqing in northern China.

The long-awaited agreement about construction of the spur coincided with an announcement by Russian Deputy Prime Minister Igor Sechin that the Chinese government would provide Russian oil firms with "considerable" loans in return for increased oil supplies (OGJ Online, Oct. 29, 2008).

During the talks in October, the Chinese government proposed a floating interest rate for the loans and said it wanted the Russian government to provide guarantees for both the loans and the oil supplies.

Since then, China apparently has been making demands the Russians find objectionable, in particular higher rates of interest on the loan owing to the recent freeze in lending following the global financial crisis.

"The working groups have suspended talks after the Chinese side raised quite absurd lending conditions…. One could have a feeling that there had been no previous round of talks in Moscow," said a Russian official.

At the latest discussions in Beijing this week, the Chinese asked to peg interest rates on the loans to London Interbank's Offered Rate after having previously agreed to lend the money at 7%/year.

The Chinese also are said to be seeking additional state guarantees from Russia on its ability to meet the oil supply side of the MOU. One source said that the Chinese "have demanded the entire Talakan field" owned by Surgutneftegas.

Valery Nesterov, an oil and gas analyst at brokers Troika Dialog, said the Russians appear to be using the suspension of talks as a negotiating tactic.

"A deviation from earlier agreements would mean reducing trading relations with a very important partner at a time when Russia is seeking new partners in Asia," Nesterov said.

"Everything is on hold now," said another source, explaining: "It is all very high-level politics."

Contact Eric Watkins at hippalus@yahoo.com.

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