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Russia, China Report Gas Deal All But Final

By Andy Tully | Mon, 19 May 2014 21:40 | 0

Russian President Vladimir Putin will be in Shanghai on May 20 and 21 to sign a long-term deal to sell gas to China.

Under the deal, Russia’s government-controlled Gazprom would provide 38 billion cubic meters of gas each year over 30 years to the China National Petroleum Corporation (CNPC) beginning in 2018. The cost to China is expected to range between $350 to $400 per thousand cubic meters.

Gazprom’s deputy director, Aleksei Miller, met in Beijing with Zhou Jiping of CNPC to work out last-minute issues on the contract. The chief snag reportedly focus on pricing the gas and how to complete the pipeline that will deliver it.

So far there is just one pipeline, called “Siberian Power,” that reaches through Russia’s Far East to deliver gas to China’s populous region north of Beijing. The question is whether the pipeline would run through Vladivostok, Russia’s port on the Sea of Japan, or through Blagoveshchensk in the eastern oblast of Amur.

Either way, both sides need to decide the last leg of the pipeline – its route into China – a project that could cost an estimated $22 billion to $30 billion. Russia has asked China either to pay for that part of the pipeline, or at least loan Russia the necessary funds to complete the project. This, too, has delayed the deal.

Nevertheless, the negotiations are in the “final phase,” Russian President Vladimir Putin said in remarks reported May 19 by the Chinese news service Xinhua. "For Russia, implementing these agreements means diversifying gas supply destinations, while for our Chinese partners ... it could be a remedy for energy shortages and helps ecological security," he said.

As in any such negotiations, the price of the commodity itself is key, but Gazprom says the differences between it and the CNPC amounts to only “one digit.”

Such a contract with China, if signed, would mark an important Russian shift to the East and away from Europe, now its chief market for gas sales. It also comes as the EU is looking to reduce its reliance on Russia for its gas, in part in reaction to what it calls Moscow’s aggression against Ukraine.

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Whether Russia would feel much punishment is debatable, though, according to William Mallinson, a former British diplomat, in an interview with the Russian broadcaster RT.

“If [a contract] is signed, it will obviously make Gazprom less reliant on profits of European markets. This will put it [Russia] in a stronger position because Europe will still need cheaper Russian gas than for example, [more costly] American LNG [liquid natural gas],” Mallinson said. “So it actually makes Russia even more independent than it already is and less reliant on the European markets.”

Meanwhile, progress was reported on May 19 in negotiations between the EU and Russia on the price Ukraine must pay Gazprom for gas already delivered. EU Energy Commissioner Guenther Oettinger said there has been no final agreement, but cited “progress on a number of issues” in talks over the past few days.

The two sides settled their differences on the price that Ukraine must pay from November 2013 through March 2014, Oettinger said, but added that the negotiators had yet to agree on the price for April, May and June.

By Andy Tully of Oilprice.com

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