Europe frets as Russia and China strike huge oil deal

Moscow to provide its eastern neighbour with 300,000 barrels a day for 25 years

Russia’s President Vladmir Putin yesterday signed one of the biggest oil deals ever with China in a move seen as signalling a massive shift from west to east in the tectonic plates of the global oil industry.

Amid continued poor diplomatic relations between Russia and western countries, as evidenced at the G8 summit, Mr Putin has been expanding diplomatic and corporate dialogue with his faster-growing neighbour to the east.

Yesterday, in a £174bn deal, Russia’s Rosneft agreed to supply some 300,000 barrels a day to China for 25 years.

The deal was structured by Igor Sechin, who some say is the most powerful man in Russia, given his role as both the minister in charge of the country’s biggest industry – oil and gas – and chairman of its partly state-owned oil giant, Rosneft.

Mr Putin described the oil deal as an “unprecedented contract” at a summit in St Petersburg.

Another major deal is to follow, in which China will make a major investment in a Russian liquefied natural gas project.

Under Mr Sechin’s command, Russia has switched its energy exports from west to east at a breathtaking pace as he has pulled oil supplies out of Europe and into Asia.

A new Pacific port and pipeline have given it the infrastructure to hike up the supply levels eastwards.

It currently exports around 750,000 barrels a day to the region – equivalent to 17 per cent of Russia’s total exports. Some analysts say that this has kept energy prices artificially high for European consumers.

Russia is pushing at an open door with Asian customers, who are seeking alternative suppliers to the unstable countries in the Middle East.

Mr Putin is fighting the threat of recession in his country in the wake of muted demand for energy in the west, and at yesterday’s summit seemed less bullish about the outlook for Russia’s oil industry. “There is no magic wand which could change the situation with one wave,” the Russian President said, declaring the era of high revenues from oil exports over.

One Russian oil industry executive said: “This is a massive deal, and it does symbolise the shift to the east. But it’s more about business than G8-style politics.”

He said Rosneft had to find cash quickly in order to pay down debt from its takeover of the giant TNK-BP for $55bn (£35bn) in March.

The deal gave it access to huge new reserves but saddled it with tens of billions of dollars of debt.

Mr Sechin seemed to confirm that Rosneft would receive a $60bn upfront payment, saying “this is one of the elements of the deal”.

London Stock Exchange-listed Glencore has already given it $10bn in return for future supplies, while a separate deal yesterday with oil trader Trafigura garnered $1.5bn.

There were no fewer than 16 press releases on various supply deals from Rosneft yesterday.

Rosneft has a nearly 40 per cent share of Russia’s entire oil output.