China, Russia agree on loans for ESPO pipeline spur

China and Russia have agreed the terms of $25 billion in loans that will enable construction of a 60-km spur from the East Siberia-Pacific Ocean pipeline, along with development of the oil supplies it will carry.

Eric Watkins
OGJ Oil Diplomacy Editor

LOS ANGELES, Feb. 17 -- China and Russia have agreed the terms of $25 billion in loans that will enable construction of a 60-km spur from the East Siberia Pacific Ocean pipeline, along with development of the oil supplies it will carry.

"They signed a series of agreements about the oil pipeline, loans and long-term crude trade," said a report over China Central Television, referring to a meeting between Chinese Prime Minister Wen Jiabao and Russian Deputy Prime Minister Igor Sechin.

In October 2008, Russia's state-owned pipeline operator OAO Transneft and China National Petroleum Corp. agreed to build the pipeline spur to carry 15 million tonnes/year from the ESPO line at Skovorodino to the Chinese border.

The long-awaited agreement about construction of the spur coincided with an announcement by Sechin that the Chinese government would provide Russian oil firms with "considerable" loans in return for increased oil supplies (OGJ, Nov. 3, 2008, p. 27).

According to the framework agreement signed by the two sides at the time, China agreed to lend Russia's OAO Rosneft $15 billion and OAO Transneft $10 billion in return for the supply of 300 million tonnes/year of oil for 15 years.

But the talks stalled in November due to disagreements over interest rates and state guarantees. The Chinese wanted to adopt a floating interest rate on the loans based on the London Interbank Offered Rate, while the Russians' wanted to keep a fixed 7% rate.

The new agreement did not specify the type or amount of interest to be paid by the Russian side, but it otherwise retained the amount of oil to be delivered from Russia to China, as well as the overall amount of the loans.

"We agreed on supplies of 15 million tonnes of oil every year over a period of 20 years," Sechin said, while Transneft Vice-Pres. Mikhail Barkov said his company would receive $10 billion of the $25 billion loan and Rosneft the other $15 billion.

As a result of the agreement, OAO Transneft said it plans to start building the Chinese spur from the ESPO line later in 2009 and to commission it in 2010.

"The construction of the leg should be synchronized with the construction of the first line of the ESPO pipeline," said Transneft vice-president Mikhail Barkov, who added that China's $10 billion loan would primarily be invested in the construction of the Chinese spur.

ESPO is being built in two phases and aims at exporting Russian oil to the Asia-Pacific region.

Phase one involves construction of a 30 million tonnes/year oil line 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 tonnes/year.

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.

Contact Eric Watkins at hippalus@yahoo.com.

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