Friday, February 27, 2009

Russia-China Oil Deal

EconomPic got an anonymous post that I've been meaning to reply to:

Anyone see this yet? China loans $25B to Russia for ~2.2B barrels of oil...that's less than $12 per barrel. Peak oil? Hmmmmm....
Further details of the transaction per Reuters:

Transneft and China National Petroleum Company (CNPC) agreed in October to build a spur to carry 15 million tonnes a year, or 300,000 barrels per day, between the countries' trunk pipelines.

Over 20 years, this adds up to 300 million tonnes, worth almost $90 billion at current prices, and enough to meet around four percent of China's current oil needs.

That last part is key... over 20 years. This is the equivalent of giving Russia a 20 year loan and expecting it to be paid back over the next 20 years. Solving for the payment size given a $25 billion present value, 365 * 20 periods, and whatever interest rate you want to assume you get the following:

Assuming a 10-12% interest rate (that of the Russian sovereign debt) over the 20 year "investment", then the price is more like $25-$30 per barrel. Looks like it could be a nice deal, but $12 it isn't.


  1. I read something about this being a barter transaction without the use of the American Dollar. Will try to find original article.

    Great Blog!

  2. Actually the Chinese loan buys access to the oil but not the oil itself, with the price being obtained monthly from Argus and Platts quotes and the interest rate pegged to LIBOR.

  3. Sprizouse- thanks for the extra info.

    I still believe my analysis is correct. Assuming one leg of the deal is exposure to oil prices vs. LIBOR and the second is the one I detailed above, you get the same conclusion ASSUMING the market price to get an oil swap is LIBOR (I do know that the embedded financing cost of the S&P 500 futures contract is LIBOR, so I'll assume oil is roughly the same).

    Thus the first leg can be hedged out, meaning it has an NPV of zero, leaving only the $20 billion for the 300,000 per day of oil for 20 years...

    Make sens?