Russia, China in Oil for Loans Agreement

Russia has signed up for a $25 billion deal with China to supply oil in exchange for loans to Russia’s state-owned oil firm Rosneft and pipeline firm Transneft. China Development Bank will lend $15 billion to Rosneft and $10 billion to Transneft; in exchange, China will receive 15 million tons — 300,000 barrels a day — of oil annually for 20 years.

China, the world’s second largest oil importer, is looking to diversify its supplies away from the Middle East. The deal is likely to have political significance, as Russia is looking at China and Japan as key markets for its Siberian oil fields. China has huge reserves, and is turning to Russia, Kazakhstan, and countries in Africa and South America, to ensure energy security.

Russia has won $25 billin in loans from China in return for agreeing to supply oil from new fields in eastern Siberia for the next 20 years as Moscow seeks funds to see its oil industry through the financial crisis.

Transneft, Russia's oil pipeline monopoly, said yesterday China had agreed to lend it $10 billion and Rosneft, Russia's state-controlled oil group, $15 billion in return for 20 years worth of oil supplies.

Igor Sechin, Russia's energy tsar and first deputy prime minister, told reporters as he left Beijing after the deal was signed that Russia agreed to supply China with 300,000 barrels of oil a day, for the next 20 years.

The deal, the largest trade financing agreement between the two countries, alleviates the severe refinancing needs of Russia's two state energy groups as they seek to weather the credit crisis with the country facing its first recession in 10 years. It will also provide China, the world's number two oil importer, with an important new secured supply of oil to fuel economic growth.

But analysts warned that Russia could have to divert crude supplies headed to the west in order to meet the terms of the deal as it faces a deepening decline in production this year. "There is no way Russia can deliver that amount of oil right now without taking it away from existing export routes to the west," said Chris Weafer, chief strategist at Uralsib investment bank in Moscow.

Analysts estimate Russian oil output will fall about 500,000 barrels a day this year as the country's industry faces a cash crunch because of a high tax regime, a dearth of financing and the need to invest more in east Siberia and the Arctic.

Oil output from Talakan and Vankor, two big new Siberian fields, is intended to fill the east-bound pipeline being built by Transneft, which will have a capacity of 600,000 barrels a day, and have a spur to China as well as to a hub on the Pacific.

Valery Nesterov, energy analyst at Troika Dialog, estimated the pipeline monopoly would need about $600 million to build the spur to the Chinese border.

PetroChina Co. and China Petroleum & Chemical Corp., the nation’s biggest oil producers, will benefit from China’s push to gain resources as the credit crisis prompts countries such as Russia to sell energy assets, said analysts.

Under the oil-for-loans agreement signed yesterday, the two companies will gain access to Russian oil at about $20 a barrel, said Wang Aochao, the Shanghai-based research director at UOB- Kay Hian Ltd. Oil in New York is trading below $35 a barrel. Investors should buy PetroChina shares, Gordon Kwan, the head of China research at CLSA Ltd., said in e-mailed comments today.

China, the world’s second-biggest energy consumer, agreed yesterday to provide Russia with $25 billion of loans in return for 20 years of crude oil supplies. The world’s third-biggest economy is winning deals as Russia faces its first recession in a decade and as the ruble tumbles after the global credit squeeze cuts demand for its exports.

“The slowdown in the Russian economy, declining crude prices and production and the credit crunch has lent the Chinese far better bargaining power,” Kwan said.

State oil producer OAO Rosneft and pipeline operator OAO Transneft signed the accord with China National Petroleum Corp., parent of PetroChina, in Beijing yesterday. Russia will deliver 15 million metric tons of crude oil a year, or about 300,000 barrels a day, to China for the next two decades, and build a branch from a new Siberian pipeline to the Chinese border, Deputy Prime Minister Igor Sechin said yesterday. The crude oil supply is equivalent to about 4 percent of China’s daily fuel consumption.

Delayed Pipeline

Plans to build the pipeline from eastern Siberia had been delayed because the countries couldn’t agree on the price to transport crude oil to the Chinese border. Construction of the branch link will start this year, an official from state-run China National Petroleum, who witnessed the signing of the oil agreement in Beijing, said in a phone interview yesterday.

“We believe Japan’s recession has given China the negotiating upper hand to take the lead in building the Russian oil pipeline to PetroChina’s Daqing infrastructure with more attractive terms from before,” said Kwan, who set PetroChina’s 12-month target price at HK$7.20.

Japan’s economy, Asia’s biggest, shrank at an annual 12.7 percent pace last quarter, the most severe contraction since 1974. Daqing is China’s biggest and oldest oilfield.

Russia’s economy may contract more than previously anticipated this year, Deputy Economy Minister Andrei Klepach said yesterday. The country is rewriting the budget to include the first deficit since the country’s twin debt default and ruble devaluation in 1998.

Counter Crisis

The oil-for-loans accord will help counter the global financial crisis, Chinese Premier Wen Jiabao said in a Xinhua News Agency report posted on the government’s Web site yesterday. The two nations have “great potential” in expanding cooperation in bilateral trade, investments and hi-tech development, Wen said in the report.

The agreement strengthened the “strategic relationship” between the countries and brings their energy partnership to a new level, China National Petroleum said today.