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. Last Updated: 07/27/2016

Oil Pipeline to China on Track

Oil giant Yukos said Tuesday its plans to build an ambitious $1.7 billion pipeline to China were moving forward and that construction should receive the green light by July 2001.

The nation's No. 2 oil company has teamed up with national oil pipeline monopoly Transneft and Chinese oil giant China National United Oil Corp., or Chinaoil, to construct a pipeline that will ship 30 million tons of crude a year by 2010.

Government authorities are expected to reach an agreement on the pipeline by the summer of 2000, while a due diligence report and financing matters will be sorted out by the first half of 2001, Yukos officials said Tuesday at a news conference.

The first phase - which will create capacity to ship up to 20 million metric tons of crude a year - will be completed by 2005. Yukos produced 44.5 million metric tons of crude in 1999.

"It is a very important project that can and will be built by 2005," said Alexander Temerko, head of the pipeline project on the Yukos side and a member of the oil company's board.

Yukos officials said the pipeline partners were mulling over two financing options: One would see Transneft foot most or all of the bill. The other would be through an international consortium that also would share in the pipeline profits.

The ownership structure of the pipeline remains up in the air and will hinge on how much each participant invests, Yukos said.

Another unresolved issue is the route of the pipeline, which will start in the Angarsk oil fields in East Siberia. Under a preliminary proposal signed by the Chinese and Russian sides, the pipeline would stretch 2,330 kilometers from Angarsk, cross Mongolia, and end in Beijing. A second possibility would be a 2,500-kilometer pipeline through northeast China.

"The final option for the route of the oil pipeline will be chosen after the [financing] is decided," Yukos said in a statement.

In the meantime, Yukos is already shipping crude to China by railroad. The oil company has signed deals with China to supply 1 million metric tons of crude in 2000 and is drawing up agreements with Chinaoil and Chinese oil major Sinopek for deliveries of 500,000 metric tons.

Yukos officials said Tuesday that the pipeline's importance was underlined by the tremendous potential of the Chinese market. China imported 35 million metric tons of crude in 1999 and is expected to order at least 50 million metric tons this year. Total deliveries on the Chinese market in 2000 will be 210 million metric tons, according to the state's economic plan.

Yukos forecasts that China's crude imports will reach 75 million metric tons in 2005.

Oil analysts praised the project Tuesday, saying Russia had long needed additional export routes, and China was a fast-growing market waiting to be tapped. Russia exports about 130 million tons a year.

"China is a growing market, definitely, for both oil and gas," said Erik Wigertz, oil analyst at Brunswick Warburg. "Meanwhile, the Chinese oil companies have faced a problem with increasing production at the rates that China will need in the future. So I think Yukos, if they build this pipeline, may have found a very good market."

The China project would probably not have too much difficulty finding investors if Yukos decides to form a consortium, said Steven Dashevsky, oil analyst at the Aton brokerage.

"If oil prices remain above $20 a barrel ... I think there should be enough cash flow and the ability to attract outside funds to finance this project," Dashevsky said.