MOSCOW China has agreed to lend Russian oil companies $25 billion (17.5 billion pounds) in return for supplies from huge new East Siberian oilfields that will power its economy for the next two decades.
Russia's state oil champion Rosneft (ROSN.MM) and pipeline monopoly Transneft (TRNF_p.RTS) on Tuesday signed a long-delayed deal to borrow the money from China Development Bank during talks in Beijing, sources close to the deal told Reuters.
"We agreed on supplies of 15 million tonnes of oil every year over a period of 20 years," Russian Deputy Prime Minister Igor Sechin told state news channel Vesti 24. He said a separate loan deal was signed but gave no further details.
Transneft Vice-President Mikhail Barkov said his company would receive $10 billion of the loan and Rosneft the other $15 billion. Rosneft declined to comment.
"The maturity is around 20 years and this credit is linked to supplies," Barkov told Reuters. "It is a historic event and the start of a big journey."
Beijing has abundant cash that Moscow needs to access as it heads into its first recession in a decade. Some Russian firms are finding it difficult to repay loans and to borrow project finance on commercial markets.
China, which is the world's No. 2 oil importer and has been working hard to win oil supplies from Africa and elsewhere to run its industries, will secure flows from its neighbour.
"Rosneft and Transneft can't borrow easily, so China steps in ... with a lot of funds to lend because of China's huge wealth funds," said Leo Drollas, deputy director and chief economist at the Centre for Global Energy Studies.
"They have trillions of dollars of reserves and they're saying 'we'll lend you this amount to develop the oil fields and the pipeline infrastructure needed' and it will be paid for by deliveries of oil," Drollas added.
The agreement, originally planned for the end of 2008, did not come easily despite being blessed high up in government.
Talks stalled in November last year over disagreements about interest rates and state guarantees China sought from the Russian government.
The interest rate was not disclosed but an industry source said it was "not very high" because of high-level state involvement.
Chinese state television reported that Chinese Prime Minister Wen Jiabao met Sechin, who oversees Russia's energy sector and is also chairman of Rosneft.
"They signed a series of agreements about the oil pipeline, loans and long-term crude trade," China Central Television reported.
Russia, the world's second-largest oil exporter after Saudi Arabia, is seeking to diversify its exports away from the West and is targeting China as the main market for oil that will be extracted from the new generation of fields in East Siberia.
Transneft and China National Petroleum Company (CNPC) agreed in October to build a spur to carry 15 million tonnes a year, or 300,000 barrels per day, between the countries' trunk pipelines.
Over 20 years, this adds up to 300 million tonnes, worth almost $90 billion at current prices, and enough to meet around four percent of China's current oil needs.
Transneft needs cash to finish construction of Russia's first pipeline to Asia, a 600,000-barrels-per-day route which will have a link to the Pacific as well as the spur to China.
Moscow had repeatedly warned that, if it failed to find a compromise with China, it would send its entire East Siberian output to the Pacific coast to supply customers such as Japan.
"For Transneft, it means they can build the pipeline (to China) without delay," said Svetlana Grizan, oil and gas analyst at VTB Capital in Moscow.
Rosneft plans to launch its huge Vankor field in East Siberia in the middle of this year. Access to Chinese loans will also help it repay some of the debt accumulated when acquiring assets that once belonged to bankrupt oil firm YUKOS.
"If the interest rate and the price of oil are favourable, it's a very good sign for the market," Grizan said.
Although China's energy hungry industry faces a severe slowdown in its export markets, it is keen to ensure energy does not constrain future growth and force up the prices it pays.
"Demand in the Chinese market by the time the crisis is over will be there," Teymur Huseynov, head of the Eurasia department at risk consultancy Exclusive Analysis, said on the sidelines of International Petroleum week in London.
"The risk is that we'll have supply bottlenecks which will again push the prices up."
(Additional reporting by Katya Golubkova in Moscow, Paul Lauener and Chris Baldwin in London and Tom Miles in Beijing; editing by Anthony Barker and Guy Dresser)