Foreign Policy Blogs

Trading With the Enemy: The Bear and the Dragon Update

In an update to the previous post, Russia is already accusing China of trying to fix market prices for the new Skovorodino-Daqing.  That’s very shocking, I know. Business Insider posted an article stating that the Russian government owned  pipeline company Transneft is not only accusing the Chinese National Petroleum Company (CNPC) of violating the terms of its contract, but is also threatening to sue CNPC.  To complete the pipeline, China financed US$25 billion for Transneft.  The repayment of this loan is tied to the expected oil flow (volume and price).

From the article:

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.”

Further, there is apparently a dispute over shipment volumes as well. The CNPC wants to double the agreed upon shipment volume from 15 to 30 million tonnes a year. China is also not paying the agreed US$20 million a month, so Russia does not want to send more oil to only have a larger payment shortfall. Transneft said that they are now more focused on Japan, South Korea, and even the U.S. as customer.  Remember, Russia, does not want China to be its primary oil buyer, because this will give China too much leverage over oil prices, which is critical to the Kremlin, as high fossil fuel prices are good for Putin’s political approval rating.

The CNPC has not responded, but the Chinese Foreign Ministry spokesman, Hong Lei, said:

“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.”