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Outside View: Russia-China oil for loans

By OLEG MITYAYEV, UPI Outside View Commentator

MOSCOW, Oct. 30 (UPI) -- China's Premier Wen Jiabao, visiting Moscow Tuesday, signed an agreement calling for the construction of an oil pipeline to China as part of the prospective Eastern Siberia-Pacific Ocean pipeline.

The agreement is expected to be followed by a contract for oil supplies to China for many years to come, against which Russian oil companies will be loaned between $20 billion and $25 billion. The loan will assist in repaying other previous loans to Western banks and in securing investments for new projects.

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The ESPO system will transport Russian oil from Eastern Siberia to the Asian-Pacific region. The first stage, with an annual capacity of 30 million metric tons, is expected to be completed by the end of 2009. This section runs from Taishet in the Irkutsk region to Skovorodino in the Amur region, only 70 kilometers from China. The project provides for a divergence of the line, with one section to China and the other to the Pacific coast at the Kozmino oil terminal.

A decision on the branch to China was up in the air until the last minute. On Oct. 25, Russia's Deputy Prime Minister Igor Sechin, who oversees fuel and energy, said state-controlled Transneft had already designed the branch. The agreement was signed by Transneft and by China's state-owned oil company China National Petroleum Corp.

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In addition, on Oct. 28, Russia and China signed a memorandum of understanding on oil cooperation. Press leaks say this agreement provides 15 million metric tons of Russian oil to China annually (for up to 20 years). At the same time, negotiators are discussing a loan (to be used as a prepayment for oil supplies) of $20 billion to $25 billion, which China will issue to Russian oil companies. Rosneft, which will deliver the oil to China, plans to receive $12 billion to $15 billion, while Transneft, which will build the line, will get $8 billion to $10 billion.

China issued a similar loan to Rosneft before. In 2004, the Russian company agreed to supply 48.4 million metric tons of oil (9.7 million metric tons a year), currently being shipped to China by rail, for five years. The CNPC paid Rosneft $6 billion in advance. This contract expires in 2010, and China needs to extend it, but also needs to contract more oil from Russia.

For the Russian companies, a new contract will be very timely amid a global financial crisis. Rosneft alone requires at least $800 million to repay its loan to Western banks (plus another $13.4 billion to be paid before the summer of 2009). Transneft, on the other hand, will be able to secure funds for new projects, including the construction of the second leg of the ESPO (toward the Pacific coast), with an estimated cost of $11 billion.

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(Oleg Mityayev is a RIA Novosti economic commentator. The opinions expressed in this article are the author's and do not necessarily represent those of RIA Novosti.)

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(United Press International's "Outside View" commentaries are written by outside contributors who specialize in a variety of important issues. The views expressed do not necessarily reflect those of United Press International. In the interests of creating an open forum, original submissions are invited.)

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