The agreement signed with Russia after the latest round of Sino-Russian energy cooperation talks just concluded in Moscow papers over some wide cracks. For one, there doesn’t seem to be much more to the agreement than that the two countries will continue to try to conclude their long running discussions over two long-term gas-supply deals. Xinhua’s report is all cheer and no content.
What the two sides have been talking about, seemingly since when the Siberian forests that became the oil and gas were still forests, is to expand an outline agreement under which from 2015 Russia’s gas monopoly Gazprom would supply 30 billion cubic meters a year–roughly one-third of China’s 2009 consumption and a quarter of Russia’s total exports–to more than double the volume, supplied via two direct pipelines from Siberia to western and central China. The formula for determining the price has been the main sticking point.
Been there, done that, got nowhere. Pricing is at the heart of the dispute over the Russian oil China has recently started getting via the Daqing spur to Russia’s East Siberia Pacific Ocean pipeline (ESPO). The deliveries are the result of $25 billion-worth of loans in 2009 from China National Petroleum Company (CNPC) and the China Development Bank to the energy company Rosneft and the state-owned pipeline monopoly Transneft that was to be repaid in oil, expected to be 15m tonnes a year (150,000 b/d) for 20 years starting this year.
The oil started flowing at the start of the year, but since then China has accused Russia of overcharging it for the deliveries, and demanded more oil as a make-up, while Russia said China was way underpaying given market conditions. The pricing formula has broken China’s way and Russia can sell to Japanese, South Korean and American customers far more profitably. It certainly has no intent to double up on its losses supplying China. Transneft has threatened to sue CNPC in court. Hard ball meets hard ball.
Meanwhile, the deliveries continue at their original levels. Last month CNPC and Rosneft broke ground for a joint-venture oil refinery in Tianjin that will be able to refine 260,000 barrels a day and is due to start operations in late 2013.
On the gas front, China’s increasing ability to source domestically and from Central Asia and some doubts about Gazprom’s capacity to deliver the extra gas has strengthened Beijing’s negotiating hand, while the higher prices Russia can get for its gas in Europe make Moscow in no hurry to resolve the issue, let alone buckle. Vice Premier Wang Qishan said after the Moscow that China “hopes the two sides could make further essential progress in gas talks as soon as possible and that the two sides exchanged views and plans on future energy cooperation, demonstrating mutual trust as well as candid and pragmatic spirit of cooperation between China and Russia”. Which pretty much says there was no progress.
The first Russian oil has flowed through the Daqing spur of the 2,750 kilometers pipeline connecting East Siberia to the Pacific Ocean (ESPO). The picture above shows the 1,000 kilometers spur at Mohe, where it enters China. Up to now China’s deliveries of Russian oil have come via Russia’s Far Eastern port of Kozmino to which it travels by rail from the Skovorodino terminal of the main ESPO pipeline.
The pipeline has been built by the Russian state companies, Transneft and Rosneft, using a 20 year $25 billion loan repayable in oil on favorable terms. China will be paying one-fifth as much for Daqing-delivered oil as it does for the supplies that come via Kozmino.
Russia sees a growing export market for its energy in China, though progress on oil stands in marked contrast to natural gas, the fuel to which China is switching from coal to generate heat and power. Negotiations over supplies and building the infrastructure to deliver them are stalled over price, and to a lesser extent some geopolitical jockeying in Central Asia. However, there has been agreement that Russia will start to supply China with Eastern Siberian gas in 2015.
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The oil pipeline from Siberia to Skovorodino on the Chinese border that Russia’s prime minister, Vladimir Putin, opened on Sunday, is a further sign of how Russia, like everyone else, is looking east for its trade as China’s economy becomes the epicenter of Asia’s growth. The line is a short 67 kms spur of the 2,750 kms pipe from Taishet in eastern Siberia to Nakhodka on the Sea of Japan that Russia will use to supply up to 1.6 million barrels a day to the growing Asian market once it is completed in 2012. The picture above shows a pumping station at Skovorodino under construction in April.
Last year, Beijing provided Moscow with a $25 billion loan repayable in oil that will let China import 300,000 barrels a day of Russian oil for 20 years from 2011, one of a series of oil-for-loans deals that Beijing has struck. Ten billion dollars of those loans, made via China Development Bank, are to Transneft, the pipeline operator. (The other $15 billion went to the oil producer Rosneft). That flow of oil will start later this year, once China has built the 930 kms link from its own oil pipeline network in Daqing to the Skovorodino spur.
PetroChina has signed a 40-60 joint venture agreement with Venezuela’s state oil company PDVSA to develop the Junin 4 block in the Orinoco belt, the massive offshore field that has proven oil reserves of 8.7 billion barrels. The goal is to extract 2.9 billion barrels of crude over the 25-year term of the JV. In parallel, China Development Bank will make $20 billion of soft loans to Venezuela secured against oil sales from the JV, part of the broader oil-for-loans accord between the two countries struck last year similar to those Beijing has with Russia, Kazakhstan and Brazil.
Venezuela President Hugo Chavez said at the weekend that $16 billion of Chinese investment will help develop not only Junin 4, but also a 500MW thermal plant in Merida state to be built by CAMC Engineering, while the soft loans will be used to build housing, roads and three 300MW power generation plants to alleviate Venezuela’s electrical power shortages.
Venezuela has become Beijing’s fifth largest trading partner in the region with bilateral trade toping $7 billion last year. Venezuela now exports 460,000 barrels of oil a day to China, up from 200,000 barrels in 2006, and the oil-for-loans accord sees that rising to 1 million barrels a day eventually.
Chavez was hoping to tout all this while playing host to President Hu Jintao, but Hu cut short a visit to South America to return to China to visit victims of the Qinghai earthquake.