Oil deals strengthen China's energy supplies

Workers at China National Petroleum Corp's facility in Tianjin. [Photo/Provided to China Daily]

As two large neighboring countries, China and Russia have strengthened their energy ties by deepening a series of cooperation projects involving oil supply, refining and liquefied natural gas exploration.

China National Petroleum Corp, the country's largest oil and gas producer, announced last week that it had signed an oil supply contract with Russian state-controlled oil giant Rosneft.

The agreement was sealed by CNPC head Zhou Jiping and Rosneft chief executive Igor Sechin in the presence of Russian President Vladimir Putin and visiting Chinese Vice Premier Zhang Gaoli, during the annual Saint Petersburg International Economic Forum.

It followed Chinese President Xi Jinping's visit to Moscow in March, and is the biggest ever between the two countries.

Over the next 25 years, the supply of Russian oil to China will more than triple from the current 15 million metric tons a year to 46.1 million tons a year.

The Russian giant also promised to supply 9.1 million tons of crude annually to the Tianjin refinery - a joint venture between the two companies - when it is put into operation.

CNPC has also gained access to Russia's arctic gas fields by concluding a framework agreement with Novatek, Russia's second biggest independent gas producer.

Under that agreement, CNPC will acquire a 20 percent stake in Novatek's Yamal LNG project and the company will embark on a series of energy cooperation projects, from upstream to downstream, with its Russian partner in natural gas.

Russia, the world's top gas exporter, is now paying increasing attention to energy-hungry Asia as European demand continues to decline.

It has for years tried to secure a deal to sell pipeline gas to China but obstacles involving pricing have stood in the way, until now.

At present, China still has a tight supply of its LNG market, but the expected increase in LNG will boost development of its downstream industry, which is currently limited by gas supply shortages, said Wang Xiaokun, a natural gas analyst with Sublime China Information Co Ltd, a domestic commodities consultancy.

"This project is significant for the company's participation in energy exploration in the Arctic region," said a CNPC statement on the deal.

The plan is that an LNG plant will be built with an annual capacity of 16.5 million tons, with production set to start sometime in 2016.

The project is currently 80-20 percent jointly owned by Novatek and the French oil giant Total.

As China's energy consumption continues to rise to satisfy its economic development, domestic natural resources companies are accelerating their moves in overseas energy markets.

China's top three oil and gas players have all now taken their first steps in searching for energy resources in the Arctic.

The country's biggest offshore oil producer CNOOC Ltd confirmed earlier this month that it was holding discussions with Iceland-based Eykon Energy to bid for an oil and gas exploration license in the region.

A source with Sinopec Group, China's biggest refiner, told China Daily that it is also holding preliminary talks with Iceland over oil and gas exploration off the northeast coast of the Nordic country.

Analysts say that the latest crude oil supply contract and the LNG cooperation will help stabilize China's energy supplies.

As much as 56.4 percent of China's crude oil was imported in 2012.

"The 25 years of crude supply from Russia will help increase China's energy security," said Zhu Chunkai, a senior oil analyst with Sublime. "The imports from Russia will take up about 10 percent of China's future crude consumption annually."