Russia, China clash over oil price, supply
By John Helmer
MOSCOW - When self-proclaimed strategic allies like Russia and China fail to
see eye to eye, they do their best to mask their differences, issuing
communiques promising amicable solutions at the next round of negotiations, or
the one after that. If Moscow and Beijing fall out, the cordiality dries up,
and the mutual silence can be deafening.
But not this time round. Just four months since the first Russian crude oil
started pumping into Daqing, the northeastern Chinese oil town, Russian
pipeline company Transneft has charged China National Petroleum Company (CNPC)
with violating their supply contract and is threatening to open court
proceedings in London.
CNPC is not acknowledging there is any dispute at all, and from
the Chinese perspective that is understandable - CNPC insists the Russians
honor their signed obligations to deliver crude oil through the new pipeline in
the monthly volumes agreed and according to the price formula both sides spent
years working out. For the Russians, however, this formula grows less
acceptable as the spot price of oil moves steadily upward.
All the Chinese have announced came from a Chinese Foreign Ministry spokesman,
Hong Lei, in Beijing on April 21: "At present all operations are going
smoothly, and oil supplies are stable. As for some concrete problems
encountered during cooperation, we believe both sides can fully resolve this in
a positive way via friendly negotiations and on a mutually beneficial, win-win
That is a diplomatic way of saying that the current windfall profit between the
contract price and the market price of the oil should stay in China's pocket.
Immediately after the May Day holiday, Transneft's spokesman, Igor Dyomin, told
Asia Times Online that oil deliveries are indeed running normally and that
negotiations over how much the Chinese should pay are indeed under way. But he
stopped short of characterizing the bargaining as friendly. The Chinese side,
he insisted, is playing "unfair" with the biggest oil supply and loan deal the
two countries have ever signed with anyone.
Transneft has revealed to Asia Times Online that the breakdown in trust between
Russia and China is focused on the pricing for the oil which Transneft is
pumping by its new Siberian pipeline from Skorovodino to the Chinese border,
according to a contract signed in 2008 with CNPC. The presidents of China and
Russia officially inaugurated the completion of the pipeline on both sides of
the border on September 25, last year. Transneft won't say what the price
formula in the original contract was. Moscow industry sources say the formula
is secret, but they don't know why.
According to one of them, OMT analyst Mikhail Mulgachev, the Russian oil being
pumped to Daqing is known by the name of the pipeline, East Siberian Pacific
Ocean, or ESPO for short. Its value is tied to the global Brent oil price
marker, he says, but he speculates that it is almost certainly at a discount to
Brent. How this "reference mechanism" between Brent and ESPO is calculated
according to the contract has not been revealed publicly, he notes.
"We believe it is sold [to CNPC] at a lower price than it is worth," he said.
What the oil is worth depends on which side of the border you are on, and
whether you are selling or buying. In 2008, when the Russians and Chinese were
still negotiating the terms for the ESPO deliveries, the Chinese reportedly
were insisting on a discount to Brent of between $2 and $3 per barrel.
ESPO pipeline project has been dogged by disagreement and controversy since it
was first conceived by Mikhail Khodorkovsky's Yukos more than a decade ago, and
initial negotiations with Beijing were conducted by Khodorkovsky's
representatives. Their attempt to break the Transneft monopoly on pipeline oil
exports was one of many problems that triggered the arrest of Khodorkovsky in
October of 2003 and his subsequent prosecution and imprisonment.
The takeover of Yukos by Rosneft, and the replacement of Khodorkovsky as the
prime mover in the project by Deputy Prime Minister Igor Sechin, did not clear
the many negotiating obstacles that arose from both sides. When finally
completed in 2009, the Sino-Russian negotiations carried a $25 billion
financing from Beijing, the largest loan yet made to Russia, divided between
Transneft ($10 billion) and Rosneft ($15 billion). Repayment is tied to the oil
flow, its volume and also its price. From the Chinese side, it appears that a
preferential state-to-state interest rate was agreed for the loan, on the
condition that reciprocal preference was agreed in the way the oil was charged
Ahead of the ceremonial completion of the pipelaying, Prime Minister Vladimir
Putin said last year: "For China, these are stable deliveries to the country's
energy balance, and for us an exit to new promising markets and in this
particular case, to the expanding Chinese market.''
It now appears this was wishful thinking. On January 1, this year, according to
a CNPC announcement, "At 6:30 am local time, the oil supply valve at Russia's
Skovorodino off-take station was turned on. At 5:48 am January 1st, 2011
Beijing time, the Russian crude was pumped into oil tanks in Mohe County in
China. At about 11:00 am, the Mohe transfer station started to delivery the oil
to Daqing, marking the official run-through of the crude inlet channel. After
arriving [at] Linyuan station at Daqing, the Russian crude will be transported
to refineries at Dalian and Fushun through the northeast pipeline network and
then become refined products for market. China used to import crude oil from
Russia via railroad. The operation of the Russia-China Crude Pipeline will not
only boost transportation capacity but also enhance security and reduce
The Chinese have also been planning to extend their section of the pipeline
from Daqing to Tainjin, where a new oil refinery is planned.
However, according to Transneft in Moscow, the Chinese are now demanding that
the piped crude should be priced the same as crude delivered for tanker loading
at Kozmino Bay, on the Sea of Japan.
Kozmino port commenced loading oil tankers in 2010, and by year's end had
dispatched 15.3 million tonnes of crude (about 300,000 barrels daily).
Destination for the cargoes were: Japan, 30%; South Korea, 29%; US, 16%;
Thailand, 11%; China, 8%; Philippines, 3%; Singapore, 2%. The port is now
operating at full capacity, so that when the second stage of the ESPO pipeline
reaches Nakhodka in 2014, with up to 30 million more tonnes of crude, the plan
is to deliver at least a third of that to a new petrochemical refinery to be
built close by.
A study by Platts, the US oil monitor, issued in February of this year, reports
that until assays of the Kozmino oil shipments confirmed that its sulphur and
other specifications made it "sweeter", and cheaper to refine than comparable
crude from Dubai, the Kozmino shipments were priced at a discount to the
western markers. But by the end of December last, Kozmnino oil was priced at a
premium to Dubai of $2 per barrel.
That extra value appears to be what the Russians want the Chinese to pay. If
the $2 Kozmino premium were added to the 311,643 barrels daily pumping through
ESPO to Daqing, that would add up to an extra $19 million per month. Dyomin for
Transneft told Asia Times Online that CNPC is paying $20 million per month
less than it should.
Transneft spokesman Igor Dyomin told Asia Times Online: "We signed a contract
with CNPC to value the oil [we deliver] at the market price with the use of
market mechanisms. So Transneft uses the Petro-Argus [publication] prices to
measure the oil cost at the Pacific Ocean. The Chinese side have agreed on
that. Now they go back on their word, claiming that the pricing mechanism is
unfair and pointing out the difference in oil prices between Skovorodino and
Kozmino. The fact is that the oil price does not include extraction and
transportation costs, but the market situation alone. Most East
Siberian-Pacific Ocean [ESPO] pipeline oil is taken from the [Rosneft] Vankor
field. But there are other fields closer to Kozmino, and still the price is the
"Even if we admit that transportation costs do count, Russia applied the
uniform tariff for East Siberia and the Far East, and there is no price
difference for oil companies as to where they enter ESPO and where they exit,
the tariff is the same. So that means the Chinese side would like to interfere
in Russia's domestic affairs and enforce their socialism upon us. Russia is
long out of socialism - we want fair market pricing."
Dyomin also reveals there is a dispute over oil shipment volumes with CNPC.
"Now CNPC wants us to increase oil shipments from 15 million to 30 million
tonnes a year. The agreement we signed provides the yearly volume of 15 million
tonnes for a period of 20 years, and we cannot revise the agreement soon. Right
now CNPC is failing to pay about $20 million a month, and if we supply twice as
much, their payment shortfall is likely to double. We have given them very good
reasons for the prices, and all we hear is that the prices are 'unfair'. The
Pacific region is one of our current goals. The top Transneft's customers are
Japan and South Korea; China is number three and the US is number four. The
ESPO oil is seen as a good replacement for the Alaskan oil, so we believe the
US will soon rank higher than China among our customers."
This is unusual outspokenness from the state pipeline company whose chief
executive, Nikolai Tokarev, has made a career of secretiveness. All the more
curious, says a Russian analyst of state contracting practices, Alexei Navalny.
He told Asia Times Online that the conflict with CNPC is not really with the
pipeline company Transneft, but with the oil producer and exporter, state oil
company Rosneft. Navalny has filed Moscow court actions as a shareholder of
Rosneft for disclosure of the terms of the company's contract to sell oil to
CNPC. He believes the price formula set by Rosneft is "far from a market one",
and accordingly it is understandable why the Russian side wants now to extract
more profit from the trade, while the Chinese insist on sticking to the
Navalny does not speculate on how the oil pricing is tied to Rosneft's and
Transneft's repayments of their China loans.
John Helmer has been a Moscow-based correspondent since 1989,
specializing in the coverage of Russian business.
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