After years of negotiations and bickering over state guarantees and interest rates, China and Russia finally inked the oil deal, where China will loan $25 billion to Russia's oil and gas companies in return for sustained crude oil supplies for 20 years in order to keep its economic juggernaut rolling.

Under the deal signed yesterday by Chinese vice premier Wang Qishan and Russian deputy prime minister Igor Dyomin, China Development Bank (CDB) will lend $15 billion to Russia's state-owned oil firms Rosneft and $10 billion to pipeline operator Transneft at a low interest rate of 6 per cent.

In exchange for the $15-billion loan, Rosneft will supply China with 15 million metric tons (300,000 barrels) of oil per day annually for 20 years while Transneft will build the extension of Russia's East Siberia Pacific Ocean pipeline to China linking the Siberian city of Skovorodino, 70km north of the Sino-Russian border, to China later this year, which will be commissioned in 2010 with the infrastructure as collateral.

The construction of the Chinese leg of the pipeline will be synchronised with the construction of the first line of the ESPO pipeline and China's loan to Transneft would primarily be invested in the construction of the Chinese spur.

ESPO is being built in two phases, with phase one involves construction of a 30 million tonnes per year oil line from Taishet to Skovorodino and then on to China while phase two will extended the pipeline from Skovorodino to the port of Kozmino on Russia's Pacific Coast.

Transneft and China National Petroleum had agreed in October 2008 to build the pipeline spur, which would transport 15 million tones of crude oil per year, but the talks failed to take off over disagreements on state guarantees and interest rates.

The Russians at that time wanted the interest rates to be fixed at 7 per cent while the Chinese were keen that the loans be kept at a floating interest rate based on the LIBOR.

The $25-billion deal benefits both countries as China is desperately seeking to enhance its oil imports, as currently it is the third-biggest importer of oil and the second biggest consumer of oil, mainly due to its strong economic development that has made the country need more and more oil to grease its ever expanding economy.

China depends on the Middle East and Africa for oil imports and in the recent past has increased efforts to procure more oil from its neighbour Russia, with whom it shares a 4,300 km border, as well as from Kazakhstan and even as far as South America.

Yesterday, the Chinese government said that it was thinking of utilising its huge foreign exchange reserves, standing at $1.85 trillion, in creating a fund where its state-owned oil companies can go in for overseas energy exploration and acquisitions. (See: China to use forex reserves to acquire energy assets)

Russia, whose economy depends very heavily on oil and gas exports, has taken a massive beating in its energy exports since last September, when the global economy started to go into a downward spin and the high price of oil made consumers spend less on oil thereby sending oil prices crashing from a record high of $147 a barrel in August to approx $40 a barrel currently.

As Russian oil companies struggle to raise capital in the current economic credit squeeze, its debt-ridden state-oil companies are in dire need of funds for investing in new oil fields and building new pipelines.

Rosneft had loaded itself with huge debts when it acquired some assets of Yukos Oil Company while Transneft, the pipeline operator needs funds to build additional pipelines.

China and Russia also signed seven agreements on energy cooperation package, where both countries jointly work in areas of oil production and processing, natural gas production and in chemical industries.

They have signed separate agreements on nuclear collaboration, which includes construction of nuclear power plant in Tianwan, Jiangsu province, uranium mining, and post-processing of spent fuel.