MOSCOW/BEIJING: A hardball game on price may leave Russia empty-handed after 15 years of talks on a deal to supply China with gas, with Beijing able to shop around thanks to a wider choice of suppliers.
As China’s new President Xi Jinping meets Russian President Vladimir Putin, prospects are dim for substantial progress on a deal between the world’s largest conventional gas producer and its fastest growing energy consumer.
The failure stands in sharp contrast to the Russian-Chinese trade in crude oil, which helped finance Moscow’s push to supply Asia from new East Siberian fields, and is likely to be expanded with new supply deal during Xi’s visit.
The gas deal has been held up by Russian gas export monopoly Gazprom’s determination to match the returns it makes on high-priced European deliveries and cover the $38bn cost of bringing its untapped East Siberian gas resources to market.
China, for its part, says it cannot afford to pay Gazprom’s asking price, which analysts and sources in the gas industry peg at $300 per thousand cubic metres.
Instead, sources say China National Petroleum Corp has dug in at $250 as the price it can pay without forcing its energy firms into losses or eroding the cost advantage which makes Chinese producers competitive in the world.
“The price difference remains considerably apart. Both sides have practical hurdles to overcome. It’s difficult for Russia to come significantly off the levels they charge Europe,” a Chinese energy industry veteran who has taken part in gas talks said.
“The two sides are moving towards each other,” he added, “but it would still take time.”
Gazprom has said it is aiming to sign a gas deal by the end of the year, and analysts say that is realistic if Russia moves quickly and shows a newfound willingness to compromise.
With competitors from Africa and Australia lined up to meet China’s additional demand, Russia needs to send a clear signal to Asian markets if it wants to gain market share in China before 2030, Tatiana Mitrova, head of the oil and gas department of the Russian Academy of Sciences Energy Research Institute said.
Mitrova estimates that a supply gap begins to emerge in China in 2020 and rises to 66 billion cubic metres of gas per year by 2030. But that market niche could be filled as China moves quickly to top up existing arrangements with suppliers such as Myanmar and the former Soviet republics of Central Asia, and moves to secure new contracts for increased supplies.
Gazprom, which puts up about a tenth of Russian budget revenues and subsidises the domestic economy with regulated gas prices, is under orders from Putin to look east as a defense against weak demand and rising competition in Europe.
But he has shown no inclination to force Gazprom’s hand in the talks, which have been a history of often-embarrassing false starts.
A Chinese deal would secure demand for reserves of gas in the ground in East Siberia, enabling the Russian export monopoly to push ahead with its plans for field development, pipeline construction and an liquefied natural gas (LNG) plant at Vladivostok.
Mitrova and Keun-Wook Paik, a senior research fellow at Oxford Institute for Energy Studies, argue that China could be a gateway for pipeline deliveries across Bohai Bay to Korea and even on to Japan, for a total of 45 bcm in annual pipeline deliveries. For China, a deal could open up a large new source of future supply which could be delivered overland at less risk than supplies of LNG delivered by tanker from as far away as Australia and Africa.
Projections for Chinese demand multiplied after Beijing’s 2011 decision to boost gas consumption at the expense of coal in hopes of cutting air pollution and greenhouse gas emissions and tapping domestic shale resources.Reuters
