Identifier
Created
Classification
Origin
09MOSCOW528
2009-03-04 13:45:00
CONFIDENTIAL
Embassy Moscow
Cable title:  

RUSSIA/CHINA OIL DEAL: CLEAR AS MUD

Tags:  EPET ENRG ECON PREL RS 
pdf how-to read a cable
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DE RUEHMO #0528/01 0631345
ZNY CCCCC ZZH
P 041345Z MAR 09
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC PRIORITY 2217
INFO RUCNCIS/CIS COLLECTIVE PRIORITY
RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUEHXD/MOSCOW POLITICAL COLLECTIVE PRIORITY
RHEHNSC/NSC WASHDC PRIORITY
RHMFISS/DEPT OF ENERGY WASHINGTON DC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
C O N F I D E N T I A L SECTION 01 OF 03 MOSCOW 000528 

SIPDIS

DEPT FOR EUR/RUS, FOR EEB/ESC/IEC GALLOGLY AND WRIGHT
EUR/CARC, SCA (GALLAGHER, SUMAR)
DOE FOR HEGBURG, EKIMOFF
DOC FOR JBROUGHER

E.O. 12958: DECL: 02/19/2019
TAGS: EPET ENRG ECON PREL RS
SUBJECT: RUSSIA/CHINA OIL DEAL: CLEAR AS MUD

REF: MOSCOW 199

Classified By: Econ MC Eric T. Schultz for Reasons 1.4 (b/d)

-------
Summary
-------

C O N F I D E N T I A L SECTION 01 OF 03 MOSCOW 000528

SIPDIS

DEPT FOR EUR/RUS, FOR EEB/ESC/IEC GALLOGLY AND WRIGHT
EUR/CARC, SCA (GALLAGHER, SUMAR)
DOE FOR HEGBURG, EKIMOFF
DOC FOR JBROUGHER

E.O. 12958: DECL: 02/19/2019
TAGS: EPET ENRG ECON PREL RS
SUBJECT: RUSSIA/CHINA OIL DEAL: CLEAR AS MUD

REF: MOSCOW 199

Classified By: Econ MC Eric T. Schultz for Reasons 1.4 (b/d)

--------------
Summary
--------------


1. (C) Following months of negotiations, Russian and Chinese
state-owned corporations recently concluded a $25 billion
loans-for-oil deal. The China Development Bank will provide
Rosneft with $15 billion and Transneft with $10 billion at a
relatively low interest rate, while the two Russian companies
will provide the Chinese National Petroleum Corporation with
15 million tons of oil per year for 20 years. The parties
involved have not released information on a number of key
elements (including pay-out provisions and oil prices),
leaving analysts guessing as to the relative merits of the
agreement for each side. The deal would appear to provide a
financial lifeline to the credit strapped Russian companies.
However, the reported benefit to China, the right to buy oil
later at or near market prices, seems limited unless, as many
experts speculate, the deal includes unspecified commercial
and/or political benefits. End summary.

--------------
What We Know
--------------


2. (C) At this point, despite numerous calls and meetings, we
have only been able to confirm a limited amount of
information regarding the recent loans-for-oil deal between
Rosneft and Transneft on the Russian side, and the China
Development Bank (CDB) and the Chinese National Petroleum
Corporation (CNPC) on the Chinese side. According to various
sources, the deal consists of at least three separate
agreements--an Intergovernmental Agreement (IGA),a
CDB-Transneft agreement and a CDB-Rosneft Agreement. Some
sort of deal covering the oil supplies will also likely be
needed between the Russian companies and the Chinese National
Petroleum Corporation (CNPC).


3. (C) The IGA: The first agreement is an Intergovernmental
Agreement (IGA) between the Russian and Chinese governments.
According to Transneft International Affairs advisor Oleg
Pillipets, the IGA provides the political and legal framework

for the deal. It was not actually "signed" by the two
countries, only "initialed." Pillipets said that the primary
purpose of the IGA was to allow for the efficient movement of
goods, labor, and other personnel across the China-Russia
border in order to complete the oil pipeline link between the
two countries.


4. (C) The Rosneft Deal: According to the Rosneft press
release, the deal between the CDB and Rosneft is a loan
package worth $15 billion in return for oil supplies in an
unspecified amount and at an unspecified price over the next
20 years. (N.B. Presumably Rosneft will be supplying the
bulk of the 15 million tons of oil referred to in the initial
announcement.) Rosneft Vice President for Finance Peter
O'Brien told us that more details would be forthcoming once
contracts are "signed and corporate approvals in place;"
implying the deal is less final than Rosneft's own press
release reported. O'Brien is quoted in press reports saying
Rosneft would use some of the loan proceeds to refinance
portions of its $21 billion in debt, of which $8.5 billion
comes due this year, with an additional $7.3 billion coming
due in the next two years. O'Brien also indicated the
company might use some of the money on acquisitions and/or to
pay dividends.


5. (C) The Transneft Deal: According to press reports and
conversations with Transneft's Pillipets, the China
Development Bank-Transneft agreement is a separate agreement
that includes a $10 billion loan from CDB to Transneft.
Pillipets informed us during a February 19th conversation
that he had not seen the final version of the contract, but
that, under an earlier draft, Transneft would be responsible
not only for completing all the necessary infrastructure to
deliver oil to China, but also for procuring oil for sale to
China. The amount of oil to be delivered, he added, would
depend on the market price of oil--if oil prices are high,

MOSCOW 00000528 002 OF 003


then less oil would be needed to cover Transneft's debt.


6. (C) Pillipets said Transneft would use its loan to
complete the first phase of the East Siberia-Pacific Ocean
(ESPO) pipeline, as well as the related infrastructure and
connections to connect ESPO to Russian oil fields. He said
Transneft expects to complete phase 1 of ESPO, to the city of
Skovorodino in the Russian Far East, by the end of 2009. He
also expects deliveries of oil to China, through a spur south
from Skovorodino to the Chinese city of Daqing, to begin in
the first half of 2010.


7. (C) The Chinese National Petroleum Corporation: Various
press releases indicate that the Chinese National Petroleum
Corporation will receive 15 million tons of oil per year as a
result of contracts related to this deal. The oil is
expected to come from Rosneft's Vankor field via Transneft's
ESPO line to China and to be supplied/paid for by both
Russian companies.


8. (C) Sector experts with whom we spoke noted that the lack
of clarity as to the details of the deal and the various
agreements was a red flag. ExxonMobil VP Zeljko Runge
(protect),for instance, said he did not believe Rosneft
would be able to deliver the promised oil from Vankor. He
noted that Vankor is already behind schedule and cannot
produce oil economically at an oil price of less than $70 per
barrel. He predicted that Rosneft would have to write down
most of the capital expenditures for the field.


9. (C) BP's government and public affairs manager, Anton
Mifsud-Bonnici (protect),told us February 20 that he, too,
does not believe Vankor can produce oil economically at
today's prices. (N.B. BP owns 1% of Rosneft stock.)
Long-time market analyst and fund manager Paul Collison
(protect) told us he considers capital costs related to
Vankor as "sunk costs" and does not incorporate them into his
models for the field's cash flow. As a result, he said he
viewed the deal generally positively for Rosneft, but
cautioned that there is a good chance the Russian side could
"screw this up."

--------------
What We Don't Know
--------------


10. (C) As Vladimir Konovalov, head of the Petroleum Advisory
Forum (the association of Western oil companies in Russia),
stated during our conversation, "put unelected political
leaders keen on lining their pockets in a room together to
hammer out a multi-billion dollar deal and, voila, you have a
non-transparent deal surrounded by white smoke." While some
details of the deal are likely to become clear over time,
others may remain forever hidden.


11. (C) Disbursement: While press releases give a maximum
amount of funding to be provided to each Russian company,
they do not give any details on how these lines of credit
would be accessed. In particular, the publicly available
information is silent on whether the Russian companies will
be able to access the full amount this year, or whether the
funds will be released in tranches and, if so, under what
conditions. Shell's manager of new business development in
Russia, Froede Linge (protect),told us February 17 he would
be shocked if China had agreed to release the loan funds to
Transneft and Rosneft in a lump sum. "How can you be sure
they would deliver?" he asked. What would happen, he
wondered, if next year Transneft had not completed the ESPO
and Rosneft was not ready to deliver oil from the Vankor
field?


12. (C) The Interest Rate: According to Rosneft's press
release, credit will be provided at "market rates." The
companies themselves have not confirmed any specific figure.
However, press reports and various privately published
analyses put the rate in the range of 5% to 6%, well below
the current market rate for the handful of Russian companies
that are fortunate to get access to foreign capital in the
current tight credit markets.


13. (C) Repayment Terms and the Price of Oil: Press releases
clearly link loan repayment to oil supply contracts. The

MOSCOW 00000528 003 OF 003


total amount of oil expected (15 million tons per year for 20
years) and the amount of credit available ($25 billion
between the two Russian companies) are known. However, the
exact modalities linking the oil and repayment are unknown,
with the key variable being the price of the oil. Rosneft
announced in its press release that the two Russian companies
would sell oil at "fair" prices, "based on market quotes."
Initial back of the envelope calculations of $20 a barrel (15
million tons divided by $25 billion) are almost certainly
wrong but so are claims in the press that, without any
supporting evidence, put the price in the range of $72 per
barrel.


14. (C) While industry press and local experts continue to
speculate, none of the parties have been willing, thus far,
to confirm any of the rumors relating to price. The more
credible analysts, however, generally agree with a press
report that cited confidential sources as saying the oil
price will be the Brent price minus $3. This tracks with
comments from Konovalov, who told us February 26 that he had
heard "rumors" that the price was to be "a few dollars" below
Brent. Fund manager Paul Collison told us on February 25
that he understands the oil will be sold at a price "tied
closely to market prices," though he was unsure of the exact
loan terms. Finally Transneft's Pillipets, who emphasized
that his information comes from an earlier draft of the
contract and that he had not seen the final document, said
the oil price was to be at "market prices at the port of
Kozimo at the time of delivery."

--------------
What This Means
--------------


15. (C) Credit for the Credit-Starved: Although few details
are available and speculation abounds, one clear take-away is
that the deal will provide needed cash to two credit-starved
Russian companies. Many investment house analysts believe
that, at the least, Rosneft and Transneft will now have cash
with which to get through a very tough year during which
Russian companies are likely to be all but frozen out of
world credit markets. With this cash infusion, Transneft
should be able to finance the ESPO project, while Rosneft
should be in a position to deal with its short-term debt
problem.


16. (C) Politics behind the Deal: In describing Russia's
calculations in the deal, BP's Mifsud-Bonnici said that
economic considerations "don't matter to the people running
the show" and he speculated that "there must be political and
military considerations related to the deal" that we may
never know. Mifsud-Bonnici said he did not believe it was
coincidence that the deal was announced a day before the
launch of the Sakhalin 2 LNG terminal, "they are showing the
world that they are paying attention to the east." Collison
also suggested that the deal is a demonstration of a new
Russian emphasis on the east.

--------------
COMMENT
--------------


17. (C) We may never know all the details of the agreements
reached between Russia and China as part of the loans-for-oil
deal. However, we are extremely dubious that political
considerations would have led the Chinese to agree to provide
low-interest loans to cash-starved Russian companies in tight
credit conditions in exchange for the right to buy oil at or
near market prices in the future. That hardly seems like a
good deal for China: there are either strings attached that
benefit China or the price will be substantially below market.
BEYRLE