Russia's Rosneft agreed to double oil supplies China, in a deal it valued at $270 billion on Friday, as the Kremlin energy champion shifts its focus to Asia from saturated and crisis-hit European markets.
Rosneft will supply China with 300,000 barrels per day over 25 years starting in the second half of the decade, on top of the 300,000 bpd it already ships to the world's largest energy consumer.
"The estimated value of the deal is $270 billion," Rosneft's boss Igor Sechin, a powerful ally of President Vladimir Putin, told reporters in what would be one of the biggest supply deals in the history of Russia, the world's top oil producer.
The speed of change in Russian export patterns has been dramatic - switching huge volumes from Europe in only five years.
Russia first started supplying China by railway and then by a new pipeline while opening a Pacific port, Kozmino, in 2009.
Together with supplies to Kozmino, it is already exporting around 750,000 barrels per day to Asia, or 17 per cent of its overall exports of 4.4 million bpd.
Europe by contrast has lost out. A decline in deliveries in the past few years partially contributed to Russian Urals crude oil often trading at a premium to benchmark dated Brent.
Analysts have expressed doubts Rosneft could quickly and significantly boost supplies to China from depleted fields in West Siberia, the historic homeland of Soviet and Russian oil production.
A source familiar with the deal said the new agreement with China was timed to tie in with the launch of new streams of East Siberian crude to avoid big redirection of existing flows and allow time to expand export infrastructure.
Big prepayment
Rosneft and oil pipeline monopoly Transneft have already secured $25 billion from China in 2009 in upfront payments by pre-selling oil in order to accumulate cash to finance growth and new construction projects.
Rosneft's debt burden has spiked this year after it acquired Anglo-Russian producer TNK-BP in a $55 billion cash-and-stock deal, the largest in Russian corporate history, and became the world's largest publicly listed oil firm.
Industry sources have told Reuters Rosneft may secure up to $30 billion in prepayment from China as part of the new deal.
That could even double, business daily Vedomosti said on Friday.
On Thursday, Putin said Rosneft's deal with China would be worth $60 billion. Vedomosti said Putin was referring to an advance payment that Rosneft would receive.
Sechin declined to comment on the details.
"This is one of the elements of the deal," he said when asked about the $60 billion component.
Analysts said the possible upfront payment from China would be a big positive for indebted Rosneft.
"If confirmed, this would be a transformational event for the company's balance sheet: Rosneft could even potentially be able to show a net cash position, though working capital would be negative. The prepayment could minimize financing risks for the leveraged state-controlled oil company," JP Morgan analysts said in a note.
TRADERS' ROLE GROWS
According to Standard and Poor's, Rosneft faces large debt maturities in 2013, 2014, and 2015 of $6.6 billion, $15.9 billon, and $16.2 billion, respectively.
Prepayment from China would allow Rosneft to lighten the burden on its balance sheet by reducing debts to banks.
The company has also used other schemes to reduce its debt, including receiving $10 billion from Glencore (GLEN.L: Quote, Profile, Research, Stock Buzz) and Vitol, the world's two largest oil trading houses, in exchange for five years of supplies.
The money was borrowed by the traders for Rosneft and gave the two Swiss trading houses unprecedented access to Russian crude supplies in Europe.
On Friday, Swiss trading house Trafigura, the world's third largest, agreed to a similar deal by pre-paying Rosneft $1.5 billion for receiving 10 million tonnes over 5 years.
Separately, Rosneft clinched a $7 billion deal with Polish refiner PKN Orlen PKN.WA to deliver 8 million tonnes of crude oil to the Czech Republic via the Druzhba pipeline.
It also signed a preliminary deal with Vitol to sell liquefied natural gas (LNG) from a Rosneft's planned plant in eastern Russia from 2019.
