China inks $25bn oil and pipeline deal with Russia

18 February 2009 09:52  [Source: ICIS news]

By Judith Wang and Dolly Wu

 

SHANGHAI (ICIS news)--China will provide a $25bn (€19.8bn) loan to Russian firms in exchange for a supply of 15m tonnes/year of crude oil from Moscow over the next 20 years, a source from state-run oil giant China National Petroleum Corporation (CNPC) said on Wednesday.

 

The construction of a key pipeline project between the two countries was also finalised, the source said.

 

Under the loan deal signed on 17 February, China, the world’s second-largest oil consumer after the US, will lend $15bn to Russia's state-owned oil firm Rosneft and $10bn to pipeline monopoly Transneft, state media China Daily reported on Wednesday.

 

The agreement would also include the construction of the long-awaited extension of Russia's Siberia-Pacific coast pipeline to China.

 

The project, which was agreed late last year, will see the extension of the pipeline from the Siberian city of Skovorodino, 70 km north of the Sino-Russian border, to China, the report said.

 

“On the Chinese side, PetroChina is a major operator in this deal. First off, we will be in charge of building the pipeline,” a source from PetroChina told ICIS news.

 

State-linked oil major PetroChina signed the agreement with Transneft on the design, construction and operation of the pipeline and penned the long-term crude oil trading agreement with the two firms, according to PetroChina’s news website.

 

“It is good news for our country, and also a boost for the energy cooperation between China and Russia,” the PetroChina source said.

 

A memorandum of cooperation in the energy sector signed in Moscow in last October said Transneft and Rosneft could get loans from China in exchange for long-term oil sales to Beijing.

 

However, talks were suspended on 12 November because of divergence of views on lending rates and loan guarantees, China Daily said.

 

“The deal means that China buys the crude at a value of $11/bbl. The price is very cheap, and should be beneficial for the giant PetroChina,” said Wang Xixin, an analyst with Wuxi-based brokerage firm Guolian Securities.

 

“PetroChina’s profit will increase by around (yuan) CNY4bn ($585m) a year as a result of the deal,” he said.

 

The Sino-Russian deal is part of a longer term strategy by energy-deficient China to secure crude oil resources and build its strategic crude reserves.

 

In related news, China is planning to start building its state reserves of refined and crude oil in order to achieve a target of 10m tonnes by the year 2011.

 

The move aims to alleviate the inventory pressure of domestic refineries during the economic slowdown, according to the website of China State Reserve Bureau.

 

The existing reserve system comprises four areas, including the national strategic oil reserve, local oil reserve, large enterprises’ oil reserve for commercial usage and smaller companies' reserves, according to the website.

 

So far, the targeted goal for the national strategic oil reserves has been achieved, the website said.

 

The inventory of commercial refined oil, which includes stocks held by China’s oil companies, achieved a record high by December 2008 due to reduced consumer demand. However, this data has not yet been published by State Reserve Bureau, industry sources said.

 

“Further development on the oil products reserves should be one part of the petrochemical stimulus package, which may be announced in the near future,” said an industry insider, adding that China had imported 38.83m tonnes of oil products including 21.6m tonnes of fuel oil and more than total 6m tonnes of kerosene and diesel oil in 2008.

 

Both PetroChina and Sinopec have increased crude oil and oil products storage in line with strategic objectives.

 

Sinopec, Asia's top refiner, has set up the Sinopec Commercial Crude Reserve Center, the first of such kind in China, which will manage the financing of oil purchases and their flow in and out of the storage facilities.

 

PetroChina said it plans to build commercial tanks which can hold 40m cubic meters of crude oil and oil products in 2009.

 

“Site selection is ongoing at present. Two sites have been selected - Qinzhou at Guangxi province in southern China and Dalian at Liaoning province in northeast China. Another site in Tianjin is under consideration,” an official from PetroChina said in Mandarin.

 

($1 = €0.79/$1 = CNY6.84)

 

With additional reportint from Dolly Wu 

 

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By: Judith Wang
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