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. Last Updated: 07/27/2016

Energy Sector Sees Profit in China Talks

Russian oil and gas companies have high hopes that talks between Chinese President Jiang Zemin and President Vladimir Putin on Monday will be another step toward opening a giant new energy market to them.

With a vast population, a galloping economy and a seemingly unquenchable thirst for oil, the Chinese market right on Siberia's doorstep has Russia's oil producers salivating.

"China represents a good export opportunity — a niche that Russian companies can occupy," Tyumen Oil Co. president Simon Kukes said.

China imports just 25,000 barrels of oil per day direct from Russia, as Soviet-era pipelines are geared to Europe. With 1.2 billion people, it is expected to consume 11 million bpd in 2020, up from 4.4 million bpd in 2000, the International Energy Agency said.

Kukes and his colleagues are hoping the new closeness between the neighbors will translate into projects to supply China with oil and gas. A slew of plans are in the works to get crude and gas from Siberia to China. Gazprom is negotiating participation in a planned east-west pipeline inside China.

"For Russia [the project] opens up the possibility of access to new energy markets — not only in China, but also those in the Asia-Pacific region," the company said in a statement.

Jiang and Putin signed a 20-year agreement on economic and military cooperation and much talk is likely to focus on energy.

Ambitious plans would see much of Russia's energy flow east.

One is a $11 billion project to develop the 30 billion-cubic-meter Kovykta gas fields and make shipments to Beijing via a new 4,000-kilometer pipeline. The project unites BP with Tyumen Oil, Interros and others.

Gazprom is backing a rival $15 billion pipeline from its Yamal-Nenets fields, while Yukos wants a $1.7 billion, 600,000-barrel-per-day oil link from Angarsk to Beijing.

Also, projects are under way to ship more oil and gas to Europe. But analysts say Chinese plans still make sense.

"Russian oil and gas companies can use increasing demand in Europe over the next few years to leverage themselves to take advantage of the tremendous growth in Asia after that," said Charles Saunders, Eastern Europe energy analyst at Nomura.

The road to Chinese markets will be fraught with hurdles.

"China and Russia is an ideal combination in terms of energy supply but it has been that for a long time," said Jonathan Stern, Associate Fellow with the Royal Institute of International Affairs.

"If you are going to spend billions of dollars building huge pipelines, you want to know who exactly will buy at what price," he said. "When you get down to specifics there is very little."

Russia and China are haggling over prices for oil to be shipped via the Yukos link, and pipelines must traverse the length of China to reach demand areas.

But these factors do not rule out opportunities, say analysts.

"The Chinese are using their huge potential demand to bargain and get lower prices," Saunders said.

"But … once we get past these tough basic issues, things will start moving."