Russia prepares to open oil pipeline to China

BEIJING (Reuters) - Russia and China broke the ice in their long-cool energy relationship on Monday as they prepared to open a pipeline that will bring Siberian crude oil to China, but a similar agreement on gas proved a bridge too far.

Russian President Dmitry Medvedev and his Chinese counterpart Hu Jintao attended a ceremony to mark the completion of the Chinese branch of the East Siberian-Pacific Ocean (ESPO) pipeline, which is set to start bringing 300,000 barrels per day across the border on January 1, 2011.

The Chinese branch is part of a bigger project that will eventually pipe oil to the Pacific Ocean, a design long seen as an attempt by Russia to counterbalance China with other buyers, such as Japan, as a market for its energy in the east.

Although Medvedev's state visit brought little that was new in terms of energy deals, the warm words contrasted strongly with the rhetoric between China and Japan in recent days.

China's relations with Japan have sharply deteriorated over a territorial dispute in the East China Sea after Japan detained a Chinese fishing trawler captain in seas claimed by both countries.

In an apparent diplomatic nod to China, Russia's State Fisheries Agency signed a memorandum of understanding with China's Agriculture Ministry on illegal fishing and sea poaching.

China also contracted Russia's Atomstroiexport to build two more reactors at the Tianwan nuclear power plant, one of a score of facilities being built or expanded in China's rapid expansion into alternative energy.

NO GAS PRICING DEAL

But Medvedev did not clinch a deal on gas pricing, the vital element that would allow the world's top gas exporter to sell to the fast-growing Chinese market.

"We are still in talks, the talks will continue, we are now agreeing on separate parameters," Russia's Deputy Prime Minister Igor Sechin told reporters on Monday.

"Russia is ready to fully ensure China's increasing demand for gas...There is a mutual understanding. If we come to an agreement on all matters discussed -- we have no doubts in it in principle -- then Russian gas exports will start from 2015. We expect commercial contracts by the middle of 2011."

China is planning to double the share of gas in its energy mix over the next decade as part of a wider drive to wean its booming economy off coal, the cheapest but dirtiest fossil fuel.

Russia, which has the world's biggest gas reserves, is keen to diversify its exports away from Europe by building new pipelines and selling gas overseas in the form of liquefied natural gas.

Medvedev's predecessor as Russia's president, the current Prime Minister Vladimir Putin, agreed in 2006 to build two pipelines to China, exporting 68 billion cubic metres of gas per year.

But the failure to reach an agreement on pricing has stymied progress on the pipeline, despite the huge potential of Russian supply and Chinese demand.

And in the intervening four years, China has rapidly locked in competing supplies -- piping it from Central Asia, importing LNG and investing in new ways of finding it on its own territory.

Domestic gas production has almost doubled to around 7.5 bcm per month and next year China will get 17 bcm via a pipeline linking Turkmenistan, Uzbekistan, Kazakhstan and China, which is even longer than the planned ESPO pipeline.

Russia now hopes to strike a deal for annual sales of 30 bcm to China from 2015.

"Practically, there are no limits for the growth of gas consumption in China," said Sechin, who is chairman of Russian oil giant Rosneft and oversees the country's energy and metals industries. "Secondly, Russia has all the gas needed for China's economic development."

"All elements of partnership are being considered: infrastructure, routes, deposits, shipments and cooperation in the financial sphere."

(Reporting by Denis Dyomkin; Writing by Tom Miles; Editing by Ken Wills and Jacqueline Wong)