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Rosneft approves changes to 300,000 b/d crude oil supply contract with China

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Rosneft approves changes to 300,000 b/d crude oil supply contract with China

Highlights

The board of directors of Russia's Rosneft Tuesday approved changes tothe existing contract with China National Petroleum Corp on supplies of300,000 b/d of crude to China to resolve a longstanding price dispute,company spokesman Rustam Kazharov said Wednesday.

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The details of the changes will be announced on March 20, in line withthe information disclosure rules, he said declining to provide any furtherdetails on the issue.

Under the deal reached with CNPC, Rosneft and Transneft are to offer theChinese company a $1.50/barrel discount on crude shipments, effective from thestart of November 2011, a source familiar with the issue confirmed to Platts.

The price will continue to be based on FOB Kozmino, the source said.

In return, CNPC is to pay its outstanding debt of $134 millionaccumulated in early 2011 when the partners were locked into the pricedispute, a few months after the crude supplies started in January 2011.

In February 2009, Transneft, Rosneft, CNPC and China Development Banksigned an agreement under which the Russian companies are to supply 15million mt/year (300,000 b/d) of crude to China via the ESPO pipeline over 20years. In return, China's Development Bank offered Rosneft and Transneft20-year loans of $15 billion and $10 billion, respectively.

But in April 2011 it emerged that China was underpaying for the Russiancrude as it believed that the transportation cost to China via the offshootfrom Skovorodino, near the border with China, had to be lower than that fordeliveries to Kozmino, which is a longer route and includes railroadtransportation.

Russia calculated a single transportation cost of Rb1,815/mt ($7.79/b)for crude deliveries via the entire ESPO route, irrespective of whether thecrude goes through the offshoot of the main ESPO line to China or istransported to the port of Kozmino on Russia's Pacific coast.

After high-level government talks, in May 2011 China paid almost $200million, or around 75% of what Rosneft and Transneft claimed they were owedin debts that had accumulated since the beginning of the year because of thedispute.

POLITICAL IMPORTANCE

The discount is estimated to cost Rosneft around $450,000/day or $3billion over the entire term of the 20-year contract.

Despite this, Rosneft considers the recent agreement with CNPC as "amajor victory" as the Chinese company was seeking a discount of $13/b, asource in the company said.

The political implications of the deal are more important as it removesuncertainty over the issue, analysts have said.

China wants to at least double its crude purchases from Russia and haseven said it is ready to take all of the ESPO volumes, representatives ofTransneft said earlier in the month.

So far, Rosneft is not in the talks over the possible increase in thevolumes, the source at Rosneft said.

Last week, the spokesman for Prime Minister Vladimir Putin, DmitryPeskov, told Platts he was "unaware of such talks on a governmental level."

Meanwhile, Rosneft is to supply at least 70% of Russian crude to a260,000 b/d refinery that Rosneft and CNPC plan to build near Tianjin innorthern China.

In late September 2010, the two companies signed an agreement to conductthe front-end engineering design study for the refinery and held agroundbreaking ceremony to mark the start of the construction.

At the time, Rosneft's CEO Eduard Khudainatov said the company's plannedsupplies to the refinery are likely to come above the existing contract.

The initial plan calls for the $5 billion refinery to be built by 2015.

The companies, however, are yet to agree on the final parameters of theassets and are also discussing possible construction of the petrochemicalcomplex "to improve the economy of the project," a source familiar with thetalks told Platts.

The partners are also considering the possibility of trading futureproducts both domestically in China and abroad, he added, providing nofurther details.

--Nadia Rodova, nadia_rodova@platts.com