The WSJ reports,"Vladimir Putin is due in Beijing this month, and the conversation between the ex-superpower and the budding one is sure to involve energy. The Ukrainian crisis has Europe, which buys 75% of Russia's gas exports, talking loudly about finding new sources. That means Moscow needs to court new buyers. It also needs to find new avenues of capital, considering a net $51 billion—equivalent to 2.5% of GDP—flowed out of the country in the first quarter.
On both counts, China is Russia's best bet. With a goal of doubling its gas market by 2020, China is one of the fastest-growing energy markets in the world. Plus, Beijing offers an alternative to Western funding. It has already struck financing deals worth more than $300 billion for long-term oil supply with Rosneft, says Citigroup.That should convince Russia's state-controlled Gazprom that it needs China National Petroleum Corp. more urgently than the other way around.
The two sides have been negotiating a 30-year gas-supply deal for about a decade, but have been stuck over the price. Gazprom wants something linked to the price of oil, the way it sells in Europe. Yet that rests on the premise that gas and oil compete as fuels. China has likely resisted the idea since in its critical power-generation sector, the alternative to gas isn't oil, but ultra-cheap coal.
The problem is the coal market is nowhere near as liquid as oil, so another option is to link to prices at gas hubs. CNPC had previously wanted to base its price off U.S. benchmark prices. But that is unrealistic given the U.S. gas market's relative isolation from the rest of the world. Gazprom said both sides agreed not to use that benchmark.
Until recently, market prices weren't conducive to a deal. Russia charged its European customers about $12.5 per million British thermal units two years ago. China paid about $10 per mmBtu for Central Asian gas. Russia could afford to say no to matching the lower price, perhaps because it thought China needed gas badly, partly to combat pollution.
In the past year, though, CNPC has gained the upper hand. Gazprom's European price has fallen to about $10.8 per mmBtu as of April, as it offers discounts to compete against Norwegian and African supplies. Meanwhile, U.S. gas exports are set to grow on the back of its shale revolution, possible given added impetus by a desire to reduce Russia's market power amid the Ukraine crisis. This gives China more options down the road. And as for China's desperation to tackle pollution, a gas deal wouldn't clear the skies overnight anyway.
Gazprom may also need to tap Chinese financing. It has to spend $80 billion to build the China pipeline and associated projects, according to James Henderson at the Oxford Institute of Energy Studies. That gives CNPC another bargaining chip".
