RUSSIA DEVELOPS ELECTRICITY, OIL PARTNERSHIP WITH CHINA

On Friday, February 9, the board of Unified Energy System, Russia’s power grid operator, approved a blueprint for large-scale electricity exports to China. UES is reportedly planning to increase electricity supplies to Northeastern China up to 3.6-4.5 billion kilowatt-hours (kWh) from 2008 on.

In the second stage of the plan, electricity exports to China would increase to 18 billion kWh from 2011, and 38 billion kWh from 2015 on. The second and third stages would require building new coal-powered plants with a total capacity of some 11,000 megawatts in the Russian Far East, according to UES. To operate the project, the UES board decided to create a fully owned subsidiary, Eastern Energy, to become an export-contract holder (Interfax, February 9).

In November 2006, UES and the State Grid Corporation of China signed a framework agreement on the basic parameters of Russian electricity exports to China. Last year, Russia supplied about 800 million kWh of electricity to China and some 500 million kWh in 2005. However, the long-term plans of UES involve annual exports of up to 60 billion kWh from Russia to China.

UES apparently plans to build new power plants close to the Chinese border. However, the UES blueprint did not mention sources of funding — the costs are estimated at some $10 billion — to build new power plants.

Last week, Russian oil executives also pledged to develop joint projects with China to pump crude oil in Russia. On February 5, the state-owned oil company Rosneft and the Chinese petrochemical corporation Sinopec held the first meeting of a bilateral coordination committee to discuss crude oil supplies to China via Mongolia, as well as future joint refinery and petrochemical projects. Rosneft first deputy CEO Nikolai Borisenko and Sinopec first vice-president Zhang Yaocang also discussed joint development of the Veninsky bloc at Sakhalin-3, as well as the Udmurtneft and Adaisky blocs in Kazakhstan. Sinopec reportedly suggested setting up a joint refinery venture in Northern China (Interfax, February 7).

Last November, Rosneft and Sinopec, a subsidiary of the China National Petroleum Corporation (CNPC), signed an agreement on strategic cooperation. According to Rosneft, joint projects with Sinopec in Russia and some third countries could eventually total $3.5 billion. In July 2005, Rosneft and Sinopec agreed to launch a joint company for geological exploration of the Veninsky deposit, part of the Sakhalin-3 project.

In October 2006, Rosneft and CNPC agreed to set up Vostok Energy, a joint venture company, to produce 10 million tons a year by 2009-2010 in Eastern Siberia and Russia’s Far East. Rosneft has a 51% stake in the joint venture, while CNPC holds the remaining 49% interest in Vostok Energy. Rosneft, CNPC, and the State Development Bank of China also had a $6 billion contract, involving supplies of 50 million tons of crude to China.

Beijing also confirmed interest in investing in Russia, notably in projects to tap the rich energy resources of Sakhalin Island. On February 8, China’s State Bank of Development (CSBD) pledged to invest up to $130 million in the Sakhalin economy. The CSBD would also provide financial backing to Sinopec for its Sakhalin-3 project, and the bank also indicated interest in coal, forestry, and agriculture projects. The Chinese reportedly requested quotas for Chinese workers to be employed in Sakhalin and also indicated interest in coal and forestry supplies from Sakhalin to China. A new entity, the Beijing-registered Zhunhai Corporation, was launched in China to manage China-invested projects in Sakhalin. During a trip to Sakhalin, the CSBD representatives also indicated potential interest in major projects, such as building a bridge to connect Sakhalin and Russia’s mainland (Interfax, February 8).

In May 2006 China’s CSBD announced it had started financing Chinese companies operating in Sakhalin. Last November, the CSBD pledged to open a $500 million credit line to Russia’s Vneshtorgbank for funding Russian-Chinese projects. Separately, both banks and the Sakhalin regional administration agreed to cooperate on investment promotion and support.

By encouraging China’s interest in gas-rich Sakhalin, Moscow apparently aims to stimulate sustainable, long-term growth of Chinese natural gas imports. China is interested in gas cooperation with Russia, First Deputy Prime Minister Dmitry Medvedev announced on February 2. China still consumes limited volumes of natural gas, but gas consumption would go up following construction of Russia’s new gas pipelines to the East, he said. Medvedev also hailed growing Russian crude supplies to China (Interfax, RIA-Novosti, February 2).

A bilateral energy partnership is developing with a background of booming trade and investment ties between Russia and China. Bilateral trade volume is expected to reach $60 billion to $80 billion by 2010, and China’s total investments in Russia should reach $12 billion before 2020. However, economic ties between Russia and China appear firmly based on the energy partnership, which remains dependent on global commodity price volatility.