Stratfor (subscription required) provided an excellent analysis of the recent discussions between China and Russia over a potential $20 -$25 billion loan to Russian state-owned companies Transneft and Rosneft to build a connector to the Eastern Siberian Pacific Ocean pipeline and ship oil to China.  As the article notes:

“…China is pondering giving Russia’s state-owned energy companies Transneft and Rosneft a $20 billion-$25 billion export-backed loan to enable them to finish constructing the portion of the Eastern Siberian Pacific Ocean pipeline (ESPO) that will connect with China. If finalized, the loan will provide the Russian companies with capital to undertake a major expansion at a time when most of the world — and especially Russia — is short on capital.

Financing ESPO, which is being built by Russia’s state-owned oil distribution company Transneft and is supposed to be supplied by state-owned oil giant Rosneft, is a massive, expensive and oft-delayed energy infrastructure project that stretches across thousands of miles of rugged Siberian wasteland. The Kremlin is backing the endeavor, and has also sought investment from Japan, South Korea and China — with little success so far.

But financing ESPO has become much harder in recent months. The global financial contagion has sunk Russia’s RTS stock exchange by 80 percent, deprived the country and its corporations of almost all foreign investment and driven global commodity prices (including oil) down 60 percent due to lack of demand as recession overtakes the Western world. Under these conditions, Rosneft and Transneft are going to be hard-pressed to come up with the capital for such an expensive project, even with Kremlin support.

Now, however, a few pieces are falling together that could make the project achievable.

China has shown a new interest in the pipeline recently, with Russia’s Transneft offering to build a spur from the pipeline that will connect to northeastern China’s oil infrastructure. China needs the energy for its own development and knows that though their business practices are not entirely reputable, Rosneft and Transneft are still possible to work with, as China loaned Rosneft $6 billion in 2004 to buy Yuganskneftegaz. Hence, Beijing’s idea of offering a $20 billion-$25 billion loan to Rosneft and Transneft. And once the pipeline is built, Russia will have no option but to ship the oil to China, while China will retain the option of re-exporting surplus through its ports. With the Russians paying off the loan over time with exported oil, China will get what it always wanted out of ESPO: a new source of energy without paying for Russian infrastructure.

A deal with China amounts to a major victory for Rosneft and Transneft. It will enable Rosneft to upgrade production and develop greenfield projects to increase supply, and will enable Transneft to handle the difficulties of construction in such a hostile natural environment. The two firms now can develop their capacity and capability while other Russian energy firms (most notably Rosneft’s chief competitor, Gazprom) remain stuck with mature fields, heavy debt and the inability to raise capital.

The Russian government needs a boost among all the bad financial and economic news, such as the near death of the Russian stock market and plummeting global energy prices. A deal with China is better than nothing, and with this one the Kremlin will see its resources finding new markets and generating new revenues. Another winner will be Russian Deputy Prime Minister Igor Sechin, the driving personality behind Rosneft and ESPO. Sechin will see his clan infused with cash at a time when cash is scarce and can generate even greater returns, especially in terms of political influence, than usual.

Though the loan has not been finalized, and the details of the agreement have not been hammered out, it appears Beijing’s interests are aligning with the interests of the various Russian players involved in ESPO. And though both sides will proceed cautiously, the rewards of realizing the project are tangible enough to keep them moving.”