Rosneft, Gazprom Sign Major New Supply Contracts with CNPC

By Ben Priddy, March 26, 2013

WEB EXCLUSIVE, Moscow. Asian giants Russia and China strengthened bilateral energy ties last week during a high-level Chinese visit led by China's new president, Xi Jinping, on his first state visit abroad. "We didn't come here and waste our time," Bloomberg quoted Xi at a Kremlin ceremony following a number of major energy agreements between CNPC, Sinopec, and their Russian counterparts Rosneft and Gazprom. In addition to promises for over $2 billion in Chinese loan advances, both Rosneft and Gazprom walked away with several new major supply contracts that also included granting Chinese national oil company CNPC exploration rights in Russia's offshore Arctic seas. The companies announced additional plans to expand joint upstream cooperation in Russia's planned offshore and East Siberia oil and gas projects.

In advance of the Chinese delegation's arrival in Moscow last week, Gazprom officials, including CEO Alexey Miller, began negotiations with CNPC in Beijing on March 13 for a new supply contract for potentially up to 68 billion cubic meters (bcm) of Russian gas via Gazprom's eastern supply route. The Russian company's new Siberian pipeline project, the "Power of Siberia," will transit new gas supplies from East Siberian hubs at Chayanda and Kovykta to northeastern China, and could come online as early as 2018, Miller announced. On March 22, Miller and CNPC counterpart Jiang Jiemin signed a preliminary memorandum of understanding in the presence of presidents Vladimir Putin and Xi Jinping for a 30-year supply contract for up to 60 bcm of Russian gas. Miller announced at the Kremlin ceremony that Gazprom could receive an advance payment for an initial 38 bcm of gas supplies from CNPC. The companies announced plans to sign binding conditions for the gas supplies in June and a final long-term supply contract by the end of 2013, a number of Russian news outlets reported.

Meanwhile, the day after Rosneft finalized its takeover of TNK-BP, making it the largest publicly-traded oil company in the world, Rosneft chief Igor Sechin also inked a number of agreements with Chinese national oil companies. On March 22, Rosneft signed a new agreement with CNPC to increase Russian oil supply deliveries to the company via the Skovorodino-Mokhe pipeline starting this year. Under the companies' current supply contract, Rosneft was already planning to increase oil flows through the pipeline by up to 800 thousand tons in 2013, from its current level of 15 million tons annually. The new agreement, however, foresees an increase in Russian crude oil deliveries to China to up to 31 million tons annually.

Interfax reported that Sechin agreed to gradually increase supply deliveries to China via three different routes, likely to include the East Siberia-Pacific Ocean (ESPO) pipeline in addition to the Skovorodino-Mokhe pipeline. The new supply contract with CNPC could make China Russia's second-largest buyer of crude oil after Germany, according to Bloomberg. Both companies also announced plans to sign an agreement later this year to build a new gas pipeline to China.

In return for increasing its purchases of Russian crude oil,