Rosneft approves changes to supply contract with China

Feb 29, 2012 12:00 AM

The board of directors of Russia's Rosneft approved changes to the existing contract with China National Petroleum Corp on supplies of 300,000 bpd of crude to China to resolve a longstanding price dispute, company spokesman Rustam Kazharov said. The details of the changes will be announced in March, in line with the information disclosure rules, he said declining to provide any further details on the issue.
Under the deal reached with CNPC, Rosneft and Transneft are to offer the Chinese company a $ 1.50 per barrel discount on crude shipments, effective from the start of November 2011, a source familiar with the issue confirmed. The price will continue to be based on FOB Kozmino, the source said.

In return, CNPC is to pay its outstanding debt of $ 134 mm accumulated in early 2011 when the partners were locked into the price dispute, a few months after the crude supplies started in January 2011. In February 2009, Transneft, Rosneft, CNPC and China Development Bank signed an agreement under which the Russian companies are to supply 300,000 bpd of crude to China via the ESPO pipeline over 20 years.
In return, China's Development Bank offered Rosneft and Transneft 20-year loans of $ 15 bn and $ 10 bn, respectively.

But in April 2011 it emerged that China was underpaying for the Russian crude as it believed that the transportation cost to China via the offshoot from Skovorodino, near the border with China, had to be lower than that for deliveries to Kozmino, which is a longer route and includes railroad transportation. Russia calculated a single transportation cost of $ 7.79 per barrel for crude deliveries via the entire ESPO route, irrespective of whether the crude goes through the offshoot of the main ESPO line to China or is transported to the port of Kozmino on Russia's Pacific coast.
After high-level government talks, in May 2011 China paid almost $ 200 mm, or around 75 % of what Rosneft and Transneft claimed they were owed in debts that had accumulated since the beginning of the year because of the dispute.

Political importance
The discount is estimated to cost Rosneft around $ 450,000 a day or $ 3 bn over the entire term of the 20-year contract. Despite this, Rosneft considers the recent agreement with CNPC as ‘a major victory’ as the Chinese company was seeking a discount of $ 13 bn. The political implications of the deal are more important as it removes uncertainty over the issue, analysts said.
China wants to at least double its crude purchases from Russia and has even said it is ready to take all of the ESPO volumes, representatives of Transneft said earlier. So far, Rosneft is not in the talks over the possible increase in the volumes, a source at Rosneft said.

Last week, the spokesman for Prime Minister Vladimir Putin, Dmitry Peskov, told he was ‘unaware of such talks on a governmental level’. Meanwhile, Rosneft is to supply at least 70 % of Russian crude to a 260,000 bpd refinery that Rosneft and CNPC plan to build near Tianjin in northern China.
In late September 2010, the two companies signed an agreement to conduct the front-end engineering design study for the refinery and held a groundbreaking ceremony to mark the start of the construction.

At the time, Rosneft's CEO Eduard Khudainatov said the company's planned supplies to the refinery are likely to come above the existing contract. The initial plan calls for the $ 5 bn refinery to be built by 2015. The companies, however, are yet to agree on the final parameters of the assets and are also discussing possible construction of the petrochemical complex "to improve the economy of the project," a source familiar with the talks told.
The partners are also considering the possibility of trading future products both domestically in China and abroad, he added.

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