Russia Feuds With China Over Oil Price: &quot;They Are Trying To Force Their Socialism Upon Us&quot;

Just four months since the first Russian crude oil started pumping into Daqing, the northeastern Chinese oil town, the Russian pipeline company Transneft has charged the China National Petroleum Company (CNPC) with violating their supply contract, and is threatening to open court proceedings in London.

The state-owned Transneft revealed to Fairplay today that the breakdown in trust between Russia and China is focused on the pricing for the oil which Transneft is pumping by its new Siberian pipeline from Skorovodino to the Chinese border, according to a contract signed in 2008 with CNPC. The presidents of China and Russia officially inaugurated the completion of the pipeline on both sides of the border on September 25, last year.

The pipeline project was first conceived by Mikhail Khodorkovsky’s Yukos more than a decade ago, and initial negotiations with Beijing were conducted by Khodorkovsky’s representatives. Their attempt to break the Transneft monopoly on pipeline oil exports was one of many problems that triggered the arrest of Khodorkovsky in October of 2003, and his subsequent prosecution and imprisonment.

The takeover of Yukos by Rosneft, and the replacement of Khodorkovsky as the prime mover in the project by Deputy Prime Minister Igor Sechin did not clear the many negotiating obstacles that arose from both sides. When finally completed in 2009, the Sino-Russian negotiations carried a $25 billion financing from Beijing, the largest loan ever made to a Russian company. Repayment is tied to the oil flow, its volume and also its price.

Ahead of the ceremonial completion of the pipelaying, Prime Minister Vladimir Putin said last year: “For China, these are stable deliveries to the country’s energy balance, and for us an exit to new promising markets and in this particular case, to the expanding Chinese market.

It now appears this was wishful thinking.

On January 1, this year, according to a CNPC announcement, “At 6:30 am local time, the oil supply valve at Russia’s Skovorodino off-take station was turned on. At 5:48 am January 1st, 2011 Beijing time, the Russian crude was pumped into oil tanks in Mohe County in China. At about 11:00 am, the Mohe transfer station started to delivery the oil to Daqing, marking the official run-through of the crude inlet channel. After arriving Linyuan station at Daqing, the Russian crude will be transported to refineries at Dalian and Fushun through the northeast pipeline network and then become refined products for market. China used to import crude oil from Russia via railroad. The operation of the Russia-China Crude Pipeline will not only boost transportation capacity but also enhance security and reduce transportation cost.”

The Chinese have also been planning to extend their section of the pipeline from Daqing to Tainjin, where a new oil refinery is planned.

However, now, according to Transneft in Moscow, the Chinese are demanding that the piped crude should be priced the same as crude delivered for tanker loading at Kozmino Bay, on the Sea of Japan.

Kozmino port commenced loading oil tankers in 2010, and by year’s end had despatched 15.3 million tonnes of crude (about 300,000 barrels daily). Destination for the cargoes were: Japan, 30%; South Korea, 29%; US, 16%; Thailand, 11%; China, 8%; Philippines, 3%; Singapore, 2%. The port is now operating at full capacity, so that when the second stage of the East Siberia-Pacific Ocean (ESPO) oil pipeline reaches Nakhodka in 2014, with up to 30 million more tonnes of crude, the plan is to deliver at least a third of that to a new petrochemical refinery.

Transneft spokesman Igor Dyomin told Fairplay: “We signed a contract with CNPC to value the oil [we deliver] at the market price with the use of market mechanisms. So Transneft uses the Petro-Argus prices to measure the oil cost at the Pacific Ocean. The Chinese side have agreed on that. Now they go back on their word, claiming that the pricing mechanism is unfair and pointing out the difference in oil prices between Skovorodino and Kozmino. The fact is that the oil price does not include extraction and transportation costs, but the market situation alone. Most East Siberian-Pacific Ocean [ESPO] pipeline oil is taken from the [Rosneft] Vankor field. But there are other fields closer to Kozmino, and still the price is the same.

“Even if we admit that transportation costs do count, Russia applied the uniform tariff for East Siberia and the Far East, and there is no price difference for oil companies as to where they enter ESPO and where they exit, the tariff is the same. So that means the Chinese side would like to interfere in Russia’s domestic affairs and enforce their socialism upon us. Russia is long out of socialism — we want fair market pricing.”

Dyomin also reveals there is a dispute over oil shipment volumes with CNPC. “Now CNPC wants us to increase oil shipments from 15 million to 30 million tonnes a year. The agreement we signed provides the yearly volume of 15 million tonnes for a period of 20 years, and we cannot revise the agreement soon. Right now CNPC is failing to pay about $20 million a month, and if we supply twice as much, their payment shortfall is likely to double. We have given them very good reasons for the prices, and all we hear is that the prices are “unfair”. The Pacific region is one of our current goals. The top Transneft’s customers are Japan and South Korea; China is number three and the US is number four. The ESPO oil is seen as a good replacement for the Alaskan oil, so we believe the US will soon rank higher than China among our customers.”

CNPC has yet to respond. Instead, a Chinese Foreign Ministry spokesman, Hong Lei, said in Beijing yesterday: “At present all operations are going smoothly, and oil supplies are stable. As for some concrete problems encountered during cooperation, we believe both sides can fully resolve this in a positive way via friendly negotiations and on a mutually beneficial, win-win basis.”