Azernews.Az

MOSCOW – China and Russia agreed to invest around $5 billion in a joint oil refinery in the Chinese city of Tianjin, but once again they failed to agree on a long-awaited natural-gas supply deal.

In a sign of closer energy ties between the world's biggest energy consumer China and energy superpower Russia, China National Petroleum Corp. and Russia's OAO Rosneft agreed to build a 260,000 barrels-a-day refinery.

The final deal was reached at a meeting in the coastal city of Tianjin between Russian Deputy Prime Minister Igor Sechin and Chinese Vice Premier Wang Qishan, and marked at a foundation-laying ceremony the two attended Tuesday.

Last year, China secured 300,000 barrels a day in Russian crude supplies for the next 20 years in exchange for a $25 billion loan. And last month, China agreed to lend Russia an additional $6 billion in exchange for increased coal supplies for the next 25 years.

Russian officials had also been hoping for a breakthrough on plans to export natural gas to China, but the two countries failed to finalize negotiations that started in 2006.

Back then, Russia said it would supply natural gas to China via two pipelines, but no contract has been signed because the state-run enterprises in the two countries have failed to agree on pricing.

The oil refinery, in which CNPC has 51% interest and Rosneft 49%, was originally envisioned to refine 200,000 barrels a day, but capacity was increased to 260,000 in light of rising petroleum demand in China, Rosneft said.

The refinery will purchase 183,000 barrels of crude oil a day at spot-market prices from Russian companies. Those deliveries come on top of what Russia agreed to supply China under the oil-for-loan deal signed between CNPC and Rosneft in April 2009. The rest of the crude feedstock for the Tianjin refinery will be bought from the Middle East.

Rosneft Chief Executive Eduard Khudainatov called the deal a "milestone" and said it "is another step in developing cooperation between the largest oil companies of our countries."

Russia has made it a strategic aim to diversify energy exports away from Europe to Asia's growing economies. The failure to reach a natural-gas deal comes amid lower demand for Russian natural gas and falling market share in Europe – the key export market for state gas company OAO Gazprom.

Last year, Russia agreed in principle to export around 70 billion cubic meters of natural gas a year to China starting in 2015. In July, Russia said it had agreed on parameters for a long-term supply contract with China, and that a final deal could be reached as early as September.

Tuesday, however, Mr. Sechin said a final natural-gas deal might not be reached until the first half of next year.

Analysts say China may not need to rely on natural gas from Russia as much as before. China started importing natural gas from Turkmenistan last year and is building new terminals to imports larger quantities of liquified natural gas.

"Russian and Chinese energy ties are more about the relationship between states than between companies, so there is always a strong geopolitical factor on top of commercial interests," said Vitaly Yermakov, director of the Moscow branch of consultants Cambridge Energy Research Agency.

The issue of natural-gas exports is expected to be at the top of the agenda during Russian President Dmitry Medvedev's visit to China next week. "It's clear that gas exports to China won't be as profitable as to Europe, but I think Russia is keen to diversify its gas exports," Mr. Yermakov said.

Engineering design for the joint oil refinery is expected be completed within six months, and Rosneft said the refinery will be completed in 2015. It will produce motor fuels, liquefied gas and petrochemicals, with more than 80% of its output higher-value "light" oil products such as car and jet fuel.

In addition to the refinery, the joint venture plans to develop a network of retail filling stations.