Russia’s Rosneft to Double Oil Supplies to China in $270 Billion Deal

on Jun 21, 2013

Kremlin-backed OAO Rosneft (MCX:ROSN) has signed a deal to supply China with $270 billion (£175 billion) worth of oil over the next 25 years. The agreement has come against the background of declining demand from European markets, with Russia trying to shift focus to Asia. Rosneft’s share price rose in Moscow trading today.

**Russia and China in $270 Billion Oil Deal**
Rosneft, 70 percent owned by the Russian state, will supply China with 300,000 barrels of oil per day over 25 years starting in the second half of the decade under the deal. The agreed volume is in addition to the 300,000 barrels per day which the Russian energy giant already supplies to China.

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“The estimated value of the deal is $270 billion,” Rosneft’s Chairman Igor Sechin has said, adding that the deal represented just one of the 30 agreements which Rosneft would sign at the St Petersburg International Economic Forum.

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Currently, Russia sends 15 million tonnes of oil a year to China through the East Siberia Pacific Ocean (ESPO) pipeline which opened in 2009. As Reuters noted, by contrast, supplies to Europe have fallen, with the decline in deliveries partly attributed to Russian Urals crude oil often trading at a premium to benchmark dated Brent crude.

The FT quoted Russia’s President Vladimir Putin as saying on yesterday, June 20, during a meeting with China’s deputy premier Zhang Gaoli, that Rosneft had prepared an “unprecedented contract” to deliver “hundreds of millions of tonnes of crude to China”. The contract was set to be followed by an agreement by Russia’s largest independent gas producer Novatec with China’s Sinopec to take a stake in the $20 billion liquefied natural gas project on Russia’s Yamal peninsula.

Analysts have expressed doubts whether Rosneft could boost supplies to China from depleted fields in West Siberia. Reuters quoted an unnamed source familiar with the deal as noting that the agreement with China was timed to tie in with the launch of new streams of East Siberian crude to avoid big redirection of existing flows and allow time for expanding the export infrastructure.

**Securing Finances**
According to industry sources the Russian energy giant might secure up to $30 billion in prepayment from China as part of the new deal, one of the biggest in the history of the global oil industry. Rosneft has been struggling with piling debt following the acquisition of the Anglo-Russian producer TNK-BP in a $55 billion cash-and-stock deal. The acquisition left BP Plc (LON:BP, NYSE:BP) with a 19.75 stake in Rosneft, making the UK energy giant the largest foreign equity investor in Russia. BP’s share price was marginally down in intraday London trading today.
In another development, Rosneft today signed a deal with Swiss trading house Trafigura which agreed to lend the Russian company $1.5 billion. By signing this deal Trafigura has joined peers Glencore and Vitol which earlier this year agreed to lend Rosneft $10 billion in exchange for five years of supplies.
**Rosneft’s share price was 0.35 percent higher at 221.31 roubles in Moscow as of 16:36 MSK on 21 June 2013.**
**BP’s share price was 0.30 percent lower at 447.85p in London. In New York, BP’s share price was 0.26 percent down at $41.57 in pre-market trading.**
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