Equipo Nizkor
        Bookshop | Donate
Derechos | Equipo Nizkor       


Time running out on Russia-China gas stalemate

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 $38 billion 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 meters.

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 meters 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.

False Starts

Gazprom, which puts up about a tenth of Russian budget revenues and subsidizes 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.

At the top end of forecasts, China National Petroleum Corp (CNPC) now sees China consuming up to 550 billion cubic meters in 2030, more than four times the amount of gas it burned in 2011.

To help make regulated gas markets more attractive, China has also embarked on a market price experiment in two industrial areas, Guangdong and Guangxi, with a view to expanding it to other cities.

"For China, the anticipated gas pricing reform does point to higher domestic buying power, but not yet to the point Russia asks," the Chinese industry veteran said.

Only Fair

One option which could be on the table at Friday's talks is Chinese financing to develop East Siberia's gas fields - but not necessarily a "loans for gas" deal along the lines of the Chinese debt financing obtained by Rosneft and oil pipeline monopoly Transneft to finance the push east.

Instead, China has suggested it would be willing to make an up-front payment for future supplies, which would result in a lower cost of delivery for Gazprom than an interest-bearing loan.

"The most effective way to reduce the border price is to apply the upfront payment without any interest or a symbolic interest rate," Paik, a former adviser to CNPC, said.

"By doing so, the price difference between Russia and China can be narrowed significantly."

Another option would be to follow the example of Rosneft and Turkmenistan and offer Chinese energy companies access to Russia's fields, letting them profit from high selling prices to offset losses on domestic sales.

Paik said China's efforts to gain upstream access in Australia and Mozambique reflected its efforts to balance the cost of importing supplies and should be taken as a hint to Gazprom, which could request access to Chinese markets in return for access to Russian fields.

"It will not be fair if China insists Russia should open the upstream sector without opening downstream sector in China. It has to be a win-win situation," he added.

"Once a reciprocal action is taken in this distribution sector, on top of the gas storage sector cooperation, I believe that the long delayed Sino-Russian gas deal can be finalized during the second half of 2013."

[Source: By Melissa Akin and Chen Aizhu, Reuters, Moscow and Beijing, 23Mar13]

Tienda de Libros Radio Nizkor On-Line Donations

Informes sobre DESC
small logoThis document has been published on 25Mar13 by the Equipo Nizkor and Derechos Human Rights. In accordance with Title 17 U.S.C. Section 107, this material is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes.