Reforms in the pipeline

In a breakthrough, a private company will start importing oil from Russia


27 Apr 2012
Week in China

Pipeline politics were top of the agenda this week as South Sudan President Salva Kiir Mayardit arrived in Beijing to seek Chinese support in a dispute on an oil supply route with its neighbour Sudan.

Dressed resplendently in a ten-gallon cowboy hat (apparently a gift from fellow oilman George W Bush), Salva Kiir has been proposing what he sees as an equally elegant solution to the current conflict: China pays for an alternate route for South Sudan’s oil through Kenya instead.

It puts China in a spot, as establishing an alternative is likely to rile authorities in Sudan, a long-time ally.

But last year, it was an oil pipeline closer to home making more positive news, with the opening of a 1,000km-long supply line from the Russian town of Skovorodino to China's north-eastern city of Daqin. Intended to transport 15 million tonnes of crude oil annually between 2011 to 2030, the project was the centrepiece of a $25 billion loan programme to the Russians in what Hu Jintao called a "milestone" in energy cooperation.

The latest project involves a veritable minnow – privately owned Heihe Menglan Xinghe Energy.

Also developed to reduce reliance on railway transport for importing oil, the venture now has a rival, albeit a much smaller one.

This follows news of a RMB7.8 billion ($1.2 billion) investment in three pipelines transporting a further five million tonnes of oil a year between Russia and China.

There's an important difference as far as the newcomer is concerned: the pipeline launched last year is operated in China by PetroChina, which overtook Exxon Mobil last year as the world’s biggest listed producer of oil. By comparison, the latest project involves a veritable minnow – privately owned Heihe Menglan Xinghe Energy.

Industry insiders say the move is a significant one, as a privately owned firm is making a dent in the state monopoly for importing oil.

Despite its small size, Xinghe Energy benefits from its location just below the Amur river (known in Chinese as Heilong Jiang) that forms the border between China and its Russian neighbour. But this deal has been a long time in the making. The local government in Heihe City in Heilongjiang province has been trying for nearly a decade to promote cooperation between its local oil companies and counterparts over the Russian border. In 2004, officials submitted a proposal to China’s highest economic planning authority, the NDRC, but it was rejected due to a preference for the involvement of larger, state-owned oil firms.

"At that time, Heilongjiang had several private enterprises that wanted to cooperate with Russian oil companies, but due to political intervention they all failed. Xinghe Energy was only one of them," an oil insider told CBN.

The project was shelved and Xinghe Energy had to wait another eight years until it received the necessary approvals. Now they have finally arrived from five major departments including the NDRC, the Ministry of Commerce and the Ministry of Foreign Affairs.

There could be more deals to follow, as a number of other oil firms are also planning to import Russian oil. Zhao Youshan, chairman of Heilongjiang Longqiang Group, has said that direct access to Russian oil is one of his own priorities, reports CBN. Zhao’s oil import company, Jianghai Company, has already signed a deal with a large Russian supplier to import 50,000 tonnes annually, which will be sold in petrol stations.

China's oil majors will be monitoring these developments closely, with CNPC (the holding company for better-known PetroChina), Sinopec and CNOOC having maintained a dominant position domestically, in part due to preferential treatment in areas like imports. Although Xinghe Energy's new pipeline is relatively small in scale – the project's five million annual capacity is a fraction of the 253 million tonnes of crude imported last year – it might signal that the government is keener to introduce more competition in the market.

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