Russia Offers China New Gas Route as Deal on West Link Drags

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Gazprom PJSC, the world’s biggest natural gas supplier, is preparing a deal with China to build a pipeline near the Pacific coast as talks about a West Siberian link drag.

The state-run Russian company plans to sign a memorandum of understanding about supplying gas to China through a pipeline from the country’s Far East during President Vladimir Putin’s visit to Beijing this week, Kremlin aide Yuri Ushakov told reporters in Moscow on Monday. The firm contract on fuel supplies from West Siberia is “unlikely” during the two-day trip set to start Wednesday, Ushakov said.

Last year, Putin reached his first $400 billion deal to supply gas to China from East Siberia, marking an energy pivot toward Asia as Russia’s relations with the U.S. and the European Union soured. Gazprom planned to follow that accord with another 30-year contract to supply gas from Siberian fields that serve its European clients after about a decade of talks.

While the company said last week that talks about the western project are on track, the Far Eastern link -- less ambitious and more interesting for China -- has a better chance, said Maxim Moshkov, an energy analyst at UBS Group AG in Moscow.

Gazprom plans to deliver as much as 30 billion cubic meters of gas a year to China from West Siberia, adding to the 38 billion cubic meters from the first contract and making China Russia’s largest customer.

Eastern Link

The eastern link delivers gas from Russia’s Sakhalin island north of Japan to the cities of Khabarovsk and Vladivostok close to China’s eastern industrial centers. Gazprom started the pipeline with an annual capacity of 6 billion cubic meters in 2011, planning to boost that level five times to feed a planned production of liquefied natural gas for China, South Korea and Japan.

Earlier this month, the U.S. imposed sanctions against Gazprom’s biggest gas field in the Far East, Yuzhno-Kirinskoye, limiting supplies of technology and equipment. The Moscow-based gas exporter planned to use fuel from the field to produce LNG in partnership with Royal Dutch Shell Plc before the curbs were imposed.

Russia may have to offer China more than a lower gas price to clinch the new deal, such as a stake in the offshore field, UralSib Capital in Moscow said in a note last week.

Gazprom said late Monday in a regulatory filing that it obtained a five-year, $1.5 billion loan from a consortium of banks headed by China Construction Bank Corp.