Russia, China find compromise on gas deal after 15 year standoff

Mon Mar 25, 2013 8:10am EDT

Related Topics

* CNPC, Gazprom agree MOU on 38 bcm per year gas from 2018

* Price issues remain unresolved

* Friday deal sources gas from East Siberia

By Melissa Akin

MOSCOW, March 25 (Reuters) - China has accepted an olive branch from Russia's Gazprom after years of tough talks which had failed to yield a deal on gas supplies, though the main point of conflict - price - remains.

Gazprom and China National Petroleum Corp (CNPC) agreed on Friday night that 38 billion cubic metres per year of Russian gas would flow to China starting in 2018 and come only from Russia's East Siberian fields, rather than the West Siberian fields which also supply Europe.

In signing the memorandum of understanding, Gazprom gave up its a dream of using its core fields in West Siberia to supply both Europe and China to become a "swing supplier" capable of sending the same gas east or west, depending on the most lucrative price option.

The 38 bcm is less than the planned 68 billion cubic metres per year it would have shipped under an earlier agreement which envisaged shipments from both untapped new fields in East Siberia which would be linked to China by a new pipeline, and West Siberia.

Even at that reduced volume, China would be Gazprom's largest customer, ahead of EU member Germany, which took over 33 bcm of Russian gas last year.

In a sign that CNPC has taken a more accommodating stance in return, the Chinese energy company agreed to discuss an up-front payment for 30 years of gas supplies, which would likely be an interest free arrangement that could whittle down the projected cost of delivering the gas, analysts said.

"It is a new vehicle to balance the price gap," Keun-Wook Paik, a senior fellow at Oxford Institute for Energy Studies, said.

Gazprom Chief Executive Alexei Miller told reporters on Friday after meetings with a Chinese delegation headed by new President Xi Jinping that the terms of the MOU would be made binding in June.

NO PRICE, NO DEAL

The current MOU still falls far short of a final accommodation on price between the world's largest conventional gas producer and the fastest-growing energy consumer.

Both sides have committed to signing a deal by year end but neither has shown any sign of conceding on price.

Analysts say the two have a short window of opportunity to do a final price deal as China moves to take advantage of rapidly expanding supply options and secure contracts to cover rising gas demand in the coming decades.

"We do expect a deal to eventually be concluded," Citi analysts wrote in a note on Monday.

"However, unless and until we get news from both sides that a price has finally been agreed to, we will consider the deal not yet done, and we are not fully convinced it will be reached in 2013."

The two sides have signed such agreements before, including one as recently as 2009, and made accommodations such as China's previous acceptance of supplies from West Siberia which were later deemed moot as price talks wore on with no resolution.

A final deal has been held up by 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 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 more competitive in the world.

Miller said a price for the gas would ultimately be determined by a formula, suggesting Gazprom still hoped for parity with its European oil-linked prices, now challenged aggressively by Gazprom's customers in Europe.

"The company wants the level of oil indexation to yield a price equivalent to its European sales," Sberbank CIB said in a research note on Monday.

"Still, this will be hard to achieve because China has opted for imports of stranded gas from East Siberia, as well as because of alternative imports from Central Asia, Myanmar and LNG."

Gazprom's attempt to play swing supplier has dogged the talks, undermining Beijing's confidence in the security of its supplies and could be a potential irritant in its relationship with the European Union if it became a competitor for Europe's gas supplies.

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