Yukos Agrees to Sell China About $150 Billion of Oil
By ANNA RAFF DOW JONES NEWSWIRES
MOSCOW -- Russia's largest oil producer, OAO Yukos, signed two landmark long-term agreements to supply China with $150 billion of oil over many years, a move that promises to accelerate Russia's incursion into China's energy market.
The bigger, 25-year supply deal, signed Wednesday during a visit to Moscow by Chinese President Hu Jintao, will require Yukos to begin shipping 20 million tons of oil a year, or 400,000 barrels a day, by pipeline in 2005. In 2010, volumes jump to 600,000 barrels daily until 2030.
These numbers have been known for some time, but this is the first time that Yukos and China National Petroleum Corp. have signed off on them as well as on a pricing formula for the export volumes.
China is trying to diversify its sources of oil imports as a hedge on long-term energy security. Imports make up a small percentage of China's total energy demand, most of which is fed by coal. But the demand for oil is rising, and pipelines from neighboring countries such as Kazakhstan and Russia are deemed to be more secure than supplies shipped in from the Middle East, Africa or Venezuela.
The pipeline also took on political dimensions, being seen by Chinese officials as a test of Chinese-Russian relations. China has lobbied hard since 1998-99 for a pipeline from Siberia to Daqing and China National Petroleum has been in serious negotiations with Yukos for two years. Russia was balking in part because of a competing plan to run a pipeline to the Far Eastern port of Nakhodka that would mainly supply the Japanese market.
Finally, CNPC needed the deal as well because Daqing, China's oldest oil field, is in decline, but the area has considerable refining capacity.
The pipeline is "very important for the crude supply for China and for CNPC because of the declining production in the northeast," said Scott Roberts, a Beijing-based analyst with Cambridge Energy Research Associates Inc. "In terms of the numbers, it would be about half of what China imports now."
However, Wednesday's signing ceremony in Moscow with Yukos Chief Executive Officer Mikhail Khodorkovsky and CNPC CEO Ma Fucai isn't the end to the odyssey. Although Yukos has cleared this key agreement, the Russian government has pushed back to mid-August approval of the feasibility study for the pipeline needed to ship these volumes, a Yukos spokesman said.
Construction of a 2,260-kilometer pipeline from the Siberian city of Angarsk to Daqing was set to start late this year but has been delayed to the spring of 2004, he added.
"We estimate that oil supplied by Yukos will amount to 10% of China's predicted annual consumption," Mr. Khodorkovsky, the Yukos CEO, told a briefing after the signing ceremony. Questions about the progress of the pipeline were deferred to AO Transneft, Russia's state pipeline operator.
One reason for the delay is the proposed pipeline's proximity to Lake Baikal and a nearby natural reserve. This complicates the approval process while Russian environmental agencies work with other ministries to finalize the route. Another, perhaps more substantial, question is, who will own the pipeline? Yukos has said it wants an equity stake and control of construction, saying it can build faster and more efficiently and has more funds than Transneft. Transneft, however, says it won't even consider such options and insists that the pipeline -- like all of Russia's other pipelines -- be state-owned.
Russia exports about four million barrels a day, the vast majority of which goes to Europe. China, however, in recent years have raised its imports of Russian oil despite the lack of pipeline infrastructure, because high global oil prices have made rail transport economically feasible. Between 2001 and 2002, daily oil imports from Russia almost doubled to 24,000 barrels, said CNPC's Mr. Ma.
The second supply deal calls for Yukos to supply China with six million tons of crude a year, or 120,000 barrels a day, to be transported by rail in the next three years, beginning in July.
"And I am sure we will soon see more developments within the framework of Russia and China's strategic energy partnership," Mr. Ma said, alluding to a joint declaration that Russian President Vladimir Putin and visiting Chinese President Hu signed on Tuesday in Moscow.
CNPC is discussing possible joint ventures to produce oil in Russia with several Russian oil companies, Mr. Ma said, but he declined to identify which ones.
"It's hard to get these kind of agreements signed without political backing," said Stephen O'Sullivan, co-head of research at United Financial Group, an investment bank in Moscow. "The fact that they were signed during Mr. Hu's visit to Russia shows that the political wind is blowing behind this pipeline now."
Originally at http://online.wsj.com/article_print/0,,SB105413719224461500,00.html
--Charles Hutzler in Beijing contributed to this article
Write to Anna Raff at anna.raff at dowjones.com1
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