Workers monitor a coal cleaning facility at Shenhua Ningxia Coal Industry Group Co Ltd in Yinchuan, the Ningxia Hui autonomous region. The coal industry accounts for about 76.7 percent of the total energy production and about 69 percent of total energy consumption in China.LIU QUANLONG/XINHUA

Shenhua Group teaming up with Rostec to explore deposits of coal

Russian state-owned holding company Rostec said on Thursday it has inked a $10 billion contract with China's Shenhua Group Corp Ltd to explore coal deposits in Siberia and the Far East of Russia.

Sergey Chemezov, CEO of the Russian industrial conglomerate, said the project will include the exploration of the Ogodzhinsky coal mine and construction of a coal terminal at Port Vera near Cape Otkytiy in the Primorsky region.

Other construction projects, such as railways and highways, a power plant and high-voltage transmission lines to China, also were part of the agreement.

"The project will solve the problem of power shortages and meet the electricity demand of both Russia's Amur region and China's northern region," Chemezov said.

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The coal mine, located in the Gerbikan-Ogodzhin coal basin in the Amur region, is estimated to have a reserve of 1.6 billion metric tons with an annual output of 30 million tons.

The exploration work is likely to start in 2016 and the mine expected to be put into production in 2019, according to Rostec.

China's coal industry accounts for about 76.7 percent of the country's total energy production and about 69 percent of total energy consumption.

But the country's coal mining companies have been facing strong headwinds in recent years stemming from price slumps as well as the government's drive to consolidate the sector.

Chemezov said even though the coal market is tough for the moment, the project his company and China's Shenhua Group are embarking on is so comprehensive it will generate very stable returns.

"The coal market has already hit bottom and is due to rebound when we start construction," he said, adding that a profit margin of about 20 to 22 percent is not out of the question.

But experts said the project's benefits may be more political than economic.

The deal came at a time when China and Russia had reached a consensus to strengthen cooperation in the energy field during a visit to China by Russian President Vladimir Putin in May.

The two countries signed a series of agreements on such major projects as a $400 billion one for Russia to supply 38 billion cubic meters of natural gas to China.

In 2013, China imported 24.35 million tons of crude oil, 27.28 million tons of coal and 3.5 billion kilowatt-hours of electricity from Russia.

Rostec, which was set up in 2007, primarily exports high-tech industrial products for civilian and military uses. In 2013, the Russian company took in $32.6 billion, with a net profit of $1.25 billion.