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China and Russia Sign Oil Deal as America Watches From the Sidelines

Politics / China Economy Apr 28, 2009 - 11:46 AM GMT

By: Money_Morning

Politics

Best Financial Markets Analysis ArticleKeith Fitz-Gerald writes: BEIJING, The People's Republic of China - It's Day Two of my three-week trip here, and already I feel myself getting quickly reacquainted with this capital city. If you've never been here, it's hard to do this city justice with simple prose - and without sounding a bit cliché. Beijing - like much of emerging China - is special. And it deserves to be seen that way.


Beijing manages to be simultaneously frenetic and calm, and exudes an energy all its own. There's no telling what's around the corner or whom you'll find here on a given day - literally. For instance, I found an immaculately detailed Ferrari in front of my hotel this morning, played pedestrian "chicken" with a custom Porsche Cayenne SUV in the crosswalk at noon and met world famous actor and Kung Fu legend, Jackie Chan, in the lobby this afternoon.

It's easy to explain why I love this city.

I'm also fascinated by the political, economic and business intrigue that is making China one of the very best profit opportunities of our lifetime. If you want proof, just look at the most recent oil-supply deals that country has reached with Russia.

Energy Deals Assist Cold War Thaw

Not long ago, I wrote about how Russia and China were destined to be global partners when it comes to energy - and noted that it would be the United States that created the incentive for these two former Cold War warriors to link up. In a story published just a few months ago, I described how China's energy foray into Iraq was the initial part of that strategy. Well now it's time for Round Two of this strategy to unfold.

Russia and China recently signed a multi-billion-dollar, intergovernmental agreement to construct an oil line from Russia that will supply oil directly to China. Actually seven agreements in one, the terms depict a deal worth trillions of dollars - including a 20-year oil contract to pump Russian oil to the Chinese market. In return, China has agreed to provide a total of $25 billion in loans to Russian oil companies Transneft and OAO Rosneft Oil Co.

The terms of the contract are fascinating - and illuminating. Russia will provide China with roughly 15 million metric tons of crude per year from 2011 to 2030, with much of the "black gold" flowing through the 1,030-kilometer pipeline that's being constructed to run from the Skovorodino refinery in Eastern Russia to Mohe County in China's Heilongjiang province. It's a branch of the even bigger 4,700 kilometers (2,900 miles) East Siberia-Pacific Ocean Pipeline that's currently under construction.

Additionally, during talks leading up to the oil-supply agreement, both nations talked turkey on such topics as natural gas, nuclear energy, coal, electric power and resource-industry-equipment manufacturing.

Is America Being Relegated to Spectator Status?

What China and Russia very clearly understand (and that the Western countries have totally missed) is that this oil-supply deal is just part of a much bigger strategic drama that's being played out here.

For its part, China believes that the oil pipeline will greatly reduce the risks of its oil imports, the majority of which come through the China's oil imports the vast majority of which come through the Strait of Malacca. (Interestingly, China's nuclear subs were just on parade for the first time ever as part of the 60th Anniversary of the founding of the PLA's Navy in Qingdao, Shandong Province).

Russia, according to Prime Minister Vladimir Putin, believes that an oil pipeline directly to China will give Russia a stable and reliable oil market in the East. Not only will this help Russia access the capital markets, but it can also help that country access hard assets from other sources, tightening Russia's grip on the top energy markets in that region of the world.

Either way, this deal is a game-changer - both for the two countries involved (China and Russia), as well as for those who aren't (the United States, for instance).
And if you take a minute to read between the lines, comments made by leaders on both sides point to a desire to have an even tighter China-Russia relationship in the years to come. This will really lock the United States out of the game, and will also wrest an increasing amount of energy-pricing control from the Organization of Petroleum Exporting Countries (OPEC) cartel - two developments that I've repeatedly warned readers to watch for.

Russian Deputy Prime Minister Alexander Zhukov used surprisingly strong language when he remarked last month that it is highly possible Russia would become China's largest energy supplier in 15 years. China Vice-Premier Wang Qishan noted that the package including all aspects of construction, loans and crude oil trade would become "immediately effective," which is translated literally from Chinese and which means that he's putting the Chinese bureaucratic machine on notice that this is a high-priority project not to be trifled with in any way.

With good reason, energy is a key to both China's ongoing development and to stability in that region. I fully expect to see more deals like this on a variety of commodities and natural resources in the next 12 months to 24 months. View each deal as a sign of a growing regional stability that could contribute markedly to China's growing leadership power, as well as to a global recovery - all of which are important developments for investors looking at this part of the world.

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