Analysts say a China-Russia loan-for-oil arrangement would be a win-win deal, but serious differences over oil prices mean negotiations are dragging on, says the National Business Daily.

On February 17, as China and Russia held their third energy dialogue in Beijing, Chinese Premier Wen Jiabao and Russian Deputy Prime Minister Igor Sechin signed a series of deals on oil pipelines, loans and long-term crude oil trade, collectively known as the "loan-for-oil deal."

Mr. Sechin disclosed that China had agreed to provide US$25 billion in loans to the Rosneft Oil Company (Rosneft) and Russian pipeline company Transneft in exchange for shipments of oil, and that Russia had committed to exporting 300 million tons of crude oil to China between 2011 and 2030.

A win-win deal

For the Russian side, Rosneft and Transneft will use the loans to maintain their day-to-day business. Furthermore, with China as the main destination for its East Siberian oil, Russia would be taking a major step forward in diversifying its oil exports.

China would be ensuring a stable oil supply from Russia's enormous and conveniently located oil fields. 300 million tons of crude oil will satisfy about 4 percent of China's current demand. Experts say, taking long-term crude prices into consideration, the value of 300 million tons is around US$160 billion, a practical use for a portion of China's huge foreign exchange reserves.

China National Petroleum Corporation (CNPC) insiders say the China-Russia energy cooperation agreement is mainly a matter of national energy security. A pipeline from Russia to the Chinese border would secure oil supplies, reduce dependence on Middle East oil and avoid strategically vulnerable maritime transport.

Drawn out negotiations

But negotiations on the loan-for-oil deal have been going on for almost 5 months. According to insiders, the talks fell into a stalemate in November over differences on interest rates and loan guarantees.

On February 17, some media reports said loans will be provided by China Development Bank (CDB) at a fixed rate of 6 percent. But a Russian official said the Chinese had been asking for 7 percent in earlier talks.

CDB's Director of Information Services Yang Hua said "CBD will issue an official statement soon, but we cannot disclose any details of the loan contract right now."

An analyst said both sides had made concessions during the negotiations. But Russia has warned many times that if China refuses to compromise, Russia will export its East Siberian crude oil to other Pacific coastal countries such as Japan.

Long way to agreement

According to reports in the Russian media, a source inside Transneft claims Russia and China have already signed an agreement on a China branch of the East Siberia-Pacific pipeline.

Jiang Yi, an expert on Russian issues from the Chinese Academy of Social Sciences, said, "China-Russia oil negotiations have not made significant progress in recent years due to differences over oil prices. To China, this loan-for-oil deal is mainly about the pipeline. Once the pipeline is complete, the Chinese side will be at an advantage."

"Although the deal has been signed, obstacles still exist. Firstly, there is no clear date set for construction of the pipeline; secondly, the amount of oil to be supplied each year has not been clearly defined; thirdly, the negotiations on oil prices are still continuing."

"To assure steady oil supplies, prices will be fixed periodically in staged negotiations, just like the current negotiations on international iron ore prices." Jiang added.

(China.org.cn by Ma Yujia, February 19, 2009)