Small Steps in China-Russia Deals

An analysis by Michael Lelyveld
china-russia-xi-putin-march-2013.jpg Chinese President Xi Jinping meets with his Russian counterpart Vladimir Putin at the Grand Kremlin Palace in Moscow, March 22, 2013.

Despite high expectations and political pressure, China and Russia seem to have made little progress on oil and gas deals during President Xi Jinping's recent visit to Moscow.

Although over 30 agreements were announced during Xi's three-day stay, no major energy contracts were signed.

Most notably, the two sides failed to resolve differences over natural gas prices, which have stalled Russian exports to China for the past seven years.

An agreement to boost Russian oil deliveries also fell short of forecasts

"Based on what we know, it sounds like much ado about nothing, to be honest," said Edward Chow, senior fellow in the energy and national security program at the Center for Strategic and International Studies in Washington.

Xi's first foreign foray as president on March 22 raised hopes for big breakthroughs between the giant petroleum producer and China's mammoth market next door.

"Oil and gas pipelines have become the veins connecting the two countries in a new century," Xi said, underlining the importance of energy trade, according to The New York Times.

"In my view, my visit has already attained its purposes, and its outcomes have surpassed my expectations," Xi said after meeting with President Vladimir Putin and Prime Minister Dmitry Medvedev, Interfax reported.


But the energy agreements largely failed to live up to their advance billing.

Two days before Xi's arrival, Reuters quoted unnamed sources saying that Russia's state-owned Rosneft oil company had agreed to more than triple its crude exports to China, reaching 50 million metric tons (1 million barrels per day) in 2018.

The deal was expected to include a Chinese loan of up to $30 billion to Rosneft, which has been raising funds for its $55-billion buyout of the TNK-BP oil company.

But the results of the agreement announced by Rosneft CEO Igor Sechin were considerably less.

The company plans to borrow just $2 billion from China Development Bank for oil supplies over 25 years, Interfax reported. Annual deliveries would rise to a peak of 31 million tons (622,000 barrels per day).

"Final binding contracts will be signed sometime later," said Sechin, as reported by Kremlin news agency RIA Novosti. Rosneft plans to raise oil supplies by only 800,000 tons (16,000 barrels per day) this year.

"The 50-million-ton level is not unreachable," Sechin insisted, although the target was not set in the latest accord.

Gazprom deal

Russian monopoly Gazprom also seems to have made little headway on a gas deal that has been subject to preliminary agreements since at least 2006.

Gazprom CEO Alexei Miller announced that the company had signed yet another memorandum of understanding on exports to China with plans to seal a contract by the end of the year.

The latest terms call for a 30-year deal for annual supplies of up to 38 billion cubic meters (1.3 trillion cubic feet) starting in 2018. The volume would equal about one- fourth of China's consumption last year

Russian exports to China could eventually grow to 60 billion cubic meters, said Miller, but the figure was a step back from previous protocols calling for a peak of 68 billion cubic meters per year.

Lack of progress

After years of pushing China to accept its first gas deliveries through a western pipeline from Siberia to remote Xinjiang, Russia finally bowed to Beijing's preference for an eastern route in December.

But the concession did little to narrow the gap between Russia's price demands and China's bids, with Gazprom pressing for European-level rates.

China National Petroleum Corp. (CNPC) has reportedly offered about 40 percent less, since it is already suffering losses on gas from Central Asia which it sells on the domestic market at government-controlled rates.

Edward Chow said the lack of progress may be the result of differing priorities. Over the years, China has made clear that it is more interested in Russia's oil than its gas.

"It seems to be more important to the Russians to be talking about gas rather than oil," said Chow, noting efforts to spur competition between Europe and Asia for Russian supplies.

Xi's visit also brought no final word on how Russia will pay for a 3,200-kilometer (1,988-mile) pipeline from Siberia's distant Yakutia region and the giant Chayanda gas field, which would be the prime source for China's eastern route.

"The possibility of an advance payment toward future gas supplies has been envisioned," Miller suggested, according to Interfax.

Bilateral trade 'remarkably small'

China's advance payments and financing for Rosneft have been a feature of its energy relations with Russia, which has kept on-the-ground access to its resources at a minimum.

In 2004, Rosneft turned to CNPC for a $4.5-billion prepayment on future oil deliveries when it needed cash to acquire assets of the Yukos oil company.

In 2009, China Development Bank loaned Rosneft another $15 billion as part of a $25-billion package to back construction of the East Siberia-Pacific Ocean (ESPO) oil pipeline with a branch to China.

The bursts of financing may raise questions about whether Russia's relations with China are as close as their leaders profess, or whether Moscow only opens its doors and its spigots when it needs the cash.

Chow noted that bilateral trade reached a relatively modest $88.2 billion last year with a target of $100 billion by the end of 2015. The numbers are a fraction of U.S.-China trade, which totaled $536.2 billion in 2012, according to the U.S. Census Bureau.

"Considering that we're talking about two continental economies that are neighbors to each other, the level of bilateral trade is remarkably small," Chow said.

But he also noted that very little of the needed infrastructure is in place to increase Russian energy exports to China.

Until it can be built over vast distances, Russia will face higher costs for exporting to China compared with closer markets in Europe, while China can more easily turn to the Persian Gulf for more energy supplies.

Small steps

Small breaks may be starting to emerge in Russia's reluctance to allow greater access for Chinese companies on its territory, however.

During Xi's visit, Rosneft and CNPC agreed to cooperate in developing three projects in the Russian offshore and eight license areas on land.

Rosneft and China's Sinopec also agreed to "optimize operations" at their existing Sakhalin-3 petroleum exploration project in the Russian Far East, where Sinopec has a 25.1-percent share. But few specifics were given.

"The partners agreed to conclude a more detailed agreement in the near future," Interfax said.


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