Russia is close to signing a decades-long contract to supply natural gas to China at a price that would value the deal at about $400 billion, according to Prime MinisterDmitry Medvedev.
Medvedev’s boss Vladimir Putin arrives in Shanghai today to try and complete an agreement after more than 10 years of talks. The stumbling block has been price, but with Putin facing trade and financial sanctions from the U.S. and European Union after he annexed Crimea from Ukraine, a deal is seen as probable.
“It’s time we reached an agreement with the Chinese on this issue,” Medvedev said in a Bloomberg Television interview in Moscow yesterday. “It is very likely that there will be a contract, which means long-term contracts.”
OAO Gazprom (OGZD), the world’s largest natural gas producer, aims to sign a contract with China National Petroleum Corp. during the visit, Russian executives and officials have said. China, Russia’s largest trading partner with $94.5 billion of business last year, was the only country in the United Nations Security Council not to censure Putin’s actions in Ukraine.
“We are just one digit away,” Chief Executive Officer Alexey Miller said on Russian state television before flying to Beijing for a meeting with CNPC Chairman Zhou Jiping on May 17. “There’s just one issue, which is the so-called P-zero, or basic starting price in the formula.”
False Starts
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 InternationalHong 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 yesterday.
Gazprom’s average price in Europe was $380.5 per thousand cubic meters last year. CLSA 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, Powell said.
‘‘Better to sign a contract at a relatively low price now, than not to sign it all,” said Ekaterina Rodina, an oil and gas analyst at VTB Bank (VTBR) in Moscow. “Especially if China agrees to provide prepayments or loans, which Gazprom could use in pipeline construction and field development.”
The crisis in Ukraine will make Russia’s government want to do a deal to persuade Europe and the U.S. that sanctions won’t hold back Russia’s economy, said Chris Weafer, a founder of Macro Advisory in Moscow.
“The Kremlin is keen to show both the European Union politicians, western companies and the domestic audience that it is not restrained by the the threat of sanctions and has plenty of energy and trade partnership options with China,” Weafer 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,” said Xizhou Zhou, director of China Energy at IHS Inc., a consultant.
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.
Iranian President Hassan Rouhani and United Nations Secretary-General Ban Ki-moon will be in China at the same time as Putin. All will attend the Conference on Interaction and Confidence Building Measures in Asia in Shanghai, said Qin Gang, a spokesman for the Foreign Affairs Ministry.
Source: Bloomberg
