Russia dangles refinery, more oil for China

A Russian deal to satisfy China's growing thirst for fuel will top the agenda as Moscow's top oil official visits China on Tuesday, but a deal to sell Russian gas to Beijing may remain elusive.

Amid Asia's clamour for the world's newest crude -- Russia's ESPO blend, delivered from new East Siberian fields to Pacific markets as far away as the United States -- the voice of China, with its soaring oil demand, is among the loudest.

In August, China consumed 7.4% more oil than a year earlier, in line with growth in industrial output, which was running ahead of expectations for the same month.

Russian deputy prime minister Igor Sechin will hold talks in China this week that will open the door for Russia to boost supplies to China, in part through a new joint venture refinery to be built by Russia's top oil producer Rosneft and PetroChina.

"Construction of a refinery close to the Russian border will feature in talks," prime minister Vladimir Putin's spokesperson, Dmitry Peskov, said.

Last month Russia completed a new section of the ESPO pipeline that can carry 15 million tonnes of crude per year to northeastern China, where the China National Petroleum Corp's (CNPC) subsidiary Petrochina operates 10 refineries.

Rosneft had expressed hope the ESPO crude would go to the joint-venture refinery in Tianjin, but CNPC allocated the oil to Petrochina plants.

"Rosneft and CNPC are shareholders in a JV company that will build a big refinery in Tianjin," Nikolai Tokarev, the head of Russia''s crude export monopoly, Transneft , told the Reuters Russia Investment Summit last week.

"It is a big, serious plant that will be supplied with Rosneft crude and so now discussions are going on, they are in progress."

ESPO oil is officially scheduled to flow to China from January 1, 2011, but a deal to boost Russian crude supplies to the country before next year may be signed when president Dmitry Medvedev visits Beijing later this month.

China could start receiving oil at a rate of 550,000 tonnes before the scheduled launch of the 15 million tonne pipeline. Rosneft will supply the oil on terms yet to be agreed upon, Tokarev said.

Sechin's talks are part of a Russia-China energy dialogue, an annual event which usually precedes a visit by Russia's president or prime minister.

"Transneft needs a separate government order to be able to transport oil to China before January 1," Tokarev said.

"We have already sent all needed documents to the government and during Dmitry Anatolevich (Medvedev's) upcoming visit to China, I think an order will be signed."

On the gas front, analysts say time is running out for Russia, which must contend with weak demand and a strong downdraft on prices in its key European export market, to clinch a gas deal with China.

Price talks have dragged on for years, while China's options for gas imports have multiplied. The country also has potential domestic shale gas reserves which could leave Russia squeezed from east and west.

Russia's ambitions to sell liquefied natural gas (LNG) to US markets have been sharply curtailed by the mass development of shale gas in North America.

As Russia has failed to strike a long term deal to sell gas to China, prospects for Kovykta, the giant Siberian gas field controlled by Russian-British oil joint venture TNK-BP, have clouded over.

The company that formally owns the field is now undergoing bankruptcy, and the deposit is expected to be transferred to a state energy holding company.