China/Russia: Putin's Visit Leads to Energy

UNCLAS SECTION 01 OF 02 BEIJING 002917 SIPDIS USDOC FOR 4420 STATE PASS USTR FOR STRATFORD E.O. 12958: N/A TAGS: ECON ENRG ETRD EFIN PREL RS CH SUBJECT: China/Russia: Putin's Visit Leads to Energy and Trade Agreements, but No Breakthroughs SENSITIVE BUT UNCLASSIFIED: NOT INTENDED FOR INTERNET DISTRIBUTION ¶1. (SBU) Summary: During Russian Prime Minister Vladimir Putin's October 13-15 visit to Beijing, the two sides agreed to a framework for continued negotiations on a natural gas purchase arrangement; formed a joint venture to explore for natural gas in Siberia; and reached agreement on a joint venture oil refinery in Tianjin. The agreements fall short of pre-visit comments by Gazprom officials of a major breakthrough in Sino-Russian energy cooperation. China also agreed to provide USD 1.7 billion of loans to Russian banks while promising to improve bilateral financial and customs cooperation. There was no announcement on establishing a currency swap agreement to facilitate trade finance, similar to what China has signed with five other countries and Hong Kong since late-2008. End Summary. Russian Gas to China -------------- ¶2. (SBU) China National Petroleum Corporation (CNPC) and Gazprom signed a framework agreement on natural gas deliveries on October 13 during the visit of Russian Prime Minister Putin, according to scholars at the Institute of Russian, Eastern European and Central Asian Studies, a research institute of the Chinese Academy of Social Sciences (CASS). The agreement could lead to Russian gas exports through two pipelines with a total volume of 68 billion cubic meters of gas a year. CASS researchers told Econoff, however, the two sides were still far apart on a pricing arrangement, with Gazprom insisting on a formula based on European natural gas prices and CNPC arguing for a lower price based on Chinese coal prices. ¶3. (SBU) Negotiations over the natural gas deal have dragged for years. The two sides originally signed in 2006 a memorandum of understanding, with the aim of starting exports of Russian gas in 2011. Even if the current framework leads to a final agreement on pricing next year, deliveries would not begin until 2014 or 2015, as the pipelines have not yet been developed. Prior to Putin's visit, Gazprom CEO Alexei Miller had promised the agreement would be concluded soon. Gas Exploration Joint Venture -------------- ¶4. (U) China and Russia agreed to establish the China- Russia Energy Investment Co. Ltd., the first oil and gas joint venture between the two countries, according to local media. The new Hong Kong-registered company acquired 51 percent of Russian oil and gas company Suntarneftegaz, which holds exploration and development rights to the Berezovsky and South Cheredeisky gasfields in Eastern Siberia with total reserves of more than 60 billion cubic meters. The JV will spend approximately USD 300 million to develop the project and plans to export gas to China, Japan, Korea and Singapore. Joint Venture Oil Refinery -------------- ¶5. (U) CNPC and Rosneft reportedly reached agreement on a joint venture oil refinery project in Tianjin with a 15 million ton capacity. The total investment is between USD 3-4 billion. The agreement also covers the construction of 300-500 gasoline stations in China. Non-Energy Deals and Direction -------------- ¶6. (U) China and Russia reportedly agreed to USD 3.5 billion in trade deals. It is unclear if this sum includes the USD 1.7 billion of loans from Chinese to Russian banks announced during Putin's visit. Vice Premier Zhang Dejiang, at the October 13 opening ceremony of the China-Russia economic forum, BEIJING 00002917 002 OF 002 said both countries needed to improve financial services and banking settlement cooperation, and both should encourage domestic banks to establish branches in the other country. He also urged the two sides to strengthen investment, technology, and standards cooperation and improve bilateral market access. Chinese and Russian customs agencies signed an MOU and established a customs cooperation sub- committee to fight gray market cross-border trade. In recent months, Chinese and foreign press also have reported that China and Russia are considering or negotiating a bilateral currency swap agreement to facilitate trade finance, similar to what China has signed with five other countries and Hong Kong since late-2008. HUNTSMAN