Ukraine crisis seen speeding Gazprom deal with China

Wed Apr 23, 2014 10:24am EDT

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By Vladimir Soldatkin and Chen Aizhu

MOSCOW/BEIJING, April 23 (Reuters) - Europe's plans to reduce its dependence on Russian energy as the Ukraine crisis threatens supplies are spurring efforts by Russia's top producer, Gazprom, to sign a deal next month to pump gas to China, industry sources say.

The elusive deal, slated to be signed next month when Russian President Vladimir Putin is expected to visit China and seen as vital if Russia is to be a big player in Asian gas markets, would wrap up a decade of talks in which price has been the main obstacle.

"Judging by the speed of work which is under way in Gazprom, I would say that the possibility that the deal would be signed is 98 percent," a Gazprom source said, adding agreement on what China would pay for the gas was close.

A Beijing-based oil executive also spoke of progress.

"The pace of negotiations was quickening up ... That means more remaining issues were being sorted out more quickly than before," the executive said.

Gazprom's partner in the deal is China National Petroleum Corp, the country's top oil and gas producer. Both firms declined comment on the talks.

Putin, who oversees all Russia's major energy deals, is expected to visit Shanghai on May 20-21, although the Kremlin has not announced the trip.

The sources said the deal was being pushed ahead by the Ukraine crisis, which has prompted Gazprom's European customers, who currently provide 80 percent of the company's revenues, to seek alternatives to Russian supplies.

Gazprom, the monopoly exporter of Russian gas by pipelines and long seen as a tool of Kremlin foreign policy, supplies a third of Europe's gas demand, half of it through Ukraine. It has warned of supply cuts to Ukraine over an unpaid gas bill, which Russia puts at $2.2 billion.

To make a deal more attractive for China, the sources said Gazprom had made further price concessions, hoping China will agree a price of $10-$11 per mmBtu (million British thermal units). China is believed to pay $9 per mmBtu to Turkmenistan, the Central Asian state that beat Gazprom to the Chinese market.

The source in China said that China would like more access to Russia's upstream assets, something Moscow has so far been reluctant to agree to.

ROSNEFT FACTOR

Under the new deal with China, Gazprom would supply 38 billion cubic metres of gas a year, around a quarter of China's current annual demand, from 2018 via a pipeline from Eastern Siberia that has yet to be built.

The Gazprom source said the company was ready to allow China to invest in the new pipeline and other infrastructure.

Fears of being pipped by rival Russian energy giant Rosneft in the race to feed China's energy needs has also seen the pace pick up in the talks, in which many deadlines have been missed.

Rosneft, headed by powerful Putin ally Igor Sechin, has secured rights to ship liquefied natural gas (LNG)abroad. It also aims to triple oil supplies to China from the 300,000 barrels a day it sent last year.

"Rosneft's push for gas exports will quicken Gazprom's decision to sign the deal with China. It is certainly one of the factors, which weaken Gazprom's negotiation position," a banking source in Moscow said, requesting anonymity.

The Oxford Institute for Energy Studies, underscoring the urgent need for Gazprom to sign the deal, said it is now or never for the Russian company.

"If it is agreed, the impact on China's domestic gas market, and on regional and global trading, will be substantial and well beyond previous expectations," it said in its quarterly journal.

"If there is no deal, Russia will have a hard time carving out a lucrative slice of the Asian gas market in coming years." (Additional reporting by Olesya Astakhova, Alexei Anishchuk and Katya Golubkova; editing by Henning Gloystein and Giles Elgood)

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