Russia Fails to Sign China Gas Deal at Shanghai Meeting
Talks are continuing as the two countries seek a compromise, Alexey Miller, chief executive officer of Russian gas-exporter OAO Gazprom (OGZD), said in a statement after Vladimir Putin and his Chinese counterpart Xi Jinping signed bilateral agreements that didn’t include the gas deal.
Russian officials said before the meeting that the two sides were very close to a deal on gas price, opening the way to building a pipeline linking the world’s largest energy producer with the biggest consumer. That has been the stumbling block throughout the past decade, though with Putin facing sanctions from the U.S. and Europe after he annexed Crimea, an agreement had been seen as more likely than at previous summits.
“It shows that Russia is not willing to cut a low-price deal just to make a political point with the west,” said Chris Weafer, founder at Macro Advisory in Moscow. “The danger is if a deal is not concluded this year China may switch its efforts to secure pipeline gas elsewhere.”
The two countries are working out pricing, and an agreement could be reached at any time, Dmitry Peskov, Putin’s spokesman, said after yesterday’s meeting.
Gazprom shares fell 1.8 percent to 145.35 rubles in Moscow yesterday.
“It’s time we reached an agreement with the Chinese on this issue,” Russian Prime Minister Dimitry Medvedev said in a Bloomberg Television interview in Moscow on May 19. “It is very likely that there will be a contract, which means long-term contracts.’
Gazprom plans to build a $22 billion pipeline to China able to carry as much as 38 billion cubic meters (1.34 trillion cubic feet) annually after years of false starts. The company may begin supplying China in 2019 to 2020, Russia Energy Minister Alexander Novak said in March.
That amount of gas is almost a quarter of China’s current consumption and about 10 percent of its estimated demand by 2020, said Gordon Kwan, head of oil and gas research at Nomura International Hong Kong Ltd.
For Gazprom, it is about 20 percent of gas sales in Europe, the company’s largest export market.
The deal has been delayed because Russia wanted to use sales contracts in the EU as a benchmark price, while China proposed a lower price, based on its imports from central Asia.
‘‘I believe that in the long run the price will be fair and totally comparable to the price of European supplies,” Russia’s Medvedev said on May 19.
Gazprom’s average price in Europe was $380.5 per thousand cubic meters last year. CLSA Ltd. forecasts a price for Russia’s gas of $9.50 to $10 per thousand cubic feet ($335 to $350 per thousand cubic meters) delivered to the Chinese border.
That target, worth almost $400 billion over a 30-year contract, compares with the $10 per thousand cubic feet China pays for imports from Turkmenistan and is substantially lower than liquefied natural gas at about $15, CLSA said.
“If the Russia-China gas deal isn’t signed in the near-term, the window of opportunity may be closing fast as other supply sources enter the market,” Xizhou Zhou, director of China Energy at IHS Inc., a consultant, said before yesterday’s meeting.
LNG projects in Australia will begin operations next year, making global gas supply “much more abundant,” according to Zhou. Gazprom’s proposed pipeline exports to China may well have to compete with LNG terminals being built in Russia.