Russia signed a pipeline deal with China on Tuesday to create a new overland supply route for Siberian oil as the two countries negotiate a package of export-backed Chinese loans expected to exceed $20 billion.
Russian pipeline monopoly Transneft (TRNF_p.MM) and China National Petroleum Corp (CNPC) agreed to build a spur to carry 15 million tonnes a year of oil (300,000 barrels per day) between the countries' trunk pipelines from 2009.
Russia, the world's second-largest oil exporter after Saudi Arabia, is seeking to diversify its exports away from the West and is targeting China as the main market for oil that will be extracted from its new generation of fields in East Siberia.
Three industry sources close to talks told Reuters on Monday the countries were in talks to secure between $20 billion and $25 billion in Chinese loans in exchange for greater supplies of Russian oil.
such a deal would give Beijing access to 300 million tonnes of Russian oil over the next 20 years -- or 15 million tonnes a year, the capacity of the pipeline spur.
This would be enough to meet 4 percent of China's annual demand, while allowing Russian firms access to finance during a global credit squeeze and an oil price slump.
"For the Chinese, it is about securing a strategically vital land route for oil imports, while for the Russians it is about the money," Alfa Bank analysts said in a note.
"Russia's oil sector will find it increasingly difficult to maintain capex, pay dividends and finance debt as oil prices drop toward $50 a barrel," Troika Dialog analysts said in a note.
State-controlled Rosneft (ROSN.MM), Russia's largest oil producer, owes $21.2 billion to creditors while Transneft has a total debt of $7.7 billion, analysts from investment bank Renaissance Capital said.
"The news that they can attract significant funding overseas at the time of a global liquidity crunch ... should eliminate investors' concerns over the companies' ability to refinance their debt and finance their capex programmes," they said.
Completion of such projects is also in China's interest.
The pipeline spur agreed on Tuesday, the cost of which has been estimated at $800 million, will branch off the East Siberian-Pacific Ocean (ESPO) pipeline at the Russian town of Skovorodino and run to the Chinese border.
But Transneft first needs to complete construction of the 600,000-barrels-per-day ESPO trunk pipeline, Russia's first to Asia, which is estimated to cost more than $14 billion and is scheduled to be finished by the end of next year.
Moscow has repeatedly warned that if it fails to find a compromise with China, it would send its entire East Siberian output to the Pacific coast to supply customers such as Japan.
And while Rosneft currently supplies its entire 10 million tonnes of annual rail exports to China -- part of a 2004 deal under which it borrowed $6 billion from China to help fund the purchase of assets belonging to bankrupt oil firm YUKOS -- the company says it does not want to extend the deal beyond 2010.
"If either side had the slight upper hand in negotiations, we think it would have been the Russians," Alfa Bank said.
"The government has more than enough resources to have supplied the money to Rosneft and Transneft directly, and oil can always be sold into the liquid global market, whereas the Chinese have few other options for finding materially large amounts of oil that can be delivered via a land route."
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- Reuters: Russian oil eyes Chinese loans after pipeline deal, October 29, 2008 1:09am EDT
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