* China seen having upper hand in gas negotiations
* Trade, political ties with Beijing seen vital to Moscow
* Russia facing growing isolation in the West
* Putin on visit to Shanghai, wins support on Ukraine
(Adds details on pricing)
By Alexei Anishchuk and Fayen Wong
SHANGHAI, May 20 China and Russia failed to sign
a $400 billion gas supply agreement on Tuesday, despite growing
urgency for the Kremlin to seal a deal as it faces economic and
political isolation in the West over the crisis in Ukraine.
Negotiators from both countries have been unable to bridge
differences on price, a spokesman for Russian President Vladimir
Putin said in Shanghai, meaning that the contract was not signed
on Tuesday as many in the industry had predicted.
But there is still a chance that the two sides could agree
before Putin leaves China on Wednesday, or, more likely, in time
for an economic forum in the Russian city of St. Petersburg
later this week.
Despite disappointment so far over an energy deal seen as
vital to both countries' long-term economic interests, Putin did
receive a rare nod of support from Chinese President Xi Jinping
over the Ukraine crisis.
In a statement issued after the two leaders met, Russia and
China called for the de-escalation of tensions in Ukraine and
for "peaceful, political ways to resolve existing problems." The
countries also referred to the crisis as "domestic".
Across much of the rest of the world, Putin stands accused
of fomenting pro-Russian sentiment in neighbouring Ukraine,
which has already lost the peninsula of Crimea after it was
annexed by Moscow.
In more recent conciliatory steps, Putin ordered Russian
forces massed on the Ukraine border to return to bases and
welcomed what the Kremlin called initial contacts between the
Ukraine government and those calling for more power for largely
Russian-speaking regions in the east.
China's Xi has underscored the importance of ties with
Russia, and Moscow was the first capital he visited after
assuming the presidency last year. Xi also attended the Winter
Olympics in Sochi at Putin's invitation.
While observing a joint naval exercise conducted outside of
Shanghai, Xi and Putin said the two neighbours would cooperate
to maintain stability in the region.
But, while the two see eye-to-eye on many diplomatic issues
including the conflict in Syria, and generally vote as one on
the United Nations Security Council, China has been less willing
to support Russia openly on Ukraine.
CHINA "HAS UPPER HAND"
Expectations had run high that Putin's China visit would
provide the setting for both parties to ink a contract under
which state-owned Gazprom would supply China National
Petroleum Corp (CNPC) with 38 billion cubic meters
(bcm) of natural gas a year for 30 years.
After more than a decade of false starts, there has been a
convergence of interests as European countries look to reduce
dependency on Russian natural gas supplies amid the Ukraine
crisis and Beijing seeks to switch from coal to cleaner fuels.
China's gas consumption is forecast to more than double
between 2014 and 2020, while Beijing's move to curb coal use led
to a severe gas supply shortage last winter.
The failure to reach a deal so far, despite talk of a
narrowing price gap, suggests China is driving a hard bargain.
"Despite all the talk out of Russia, despite their
desperation, China has the upper hand," said Gordon Kwan,
regional head of oil and gas research at Nomura Research.
"China wants to really squeeze the price lower. China has
other options such as the gas project in Sichuan and North
American liquefied natural gas. I think it will be a mistake by
Russia if they couldn't agree on a deal just because of the
Gazprom's shares were down 2.3 percent at 1105 GMT on
Tuesday, underperforming a flat Moscow stock market.
But Russia said there was still a chance a deal could be
reached in China.
"The visit is not over yet. Talks will continue ...
substantial progress is reached but there is still work to do on
price," Putin's spokesman, Dmitry Peskov, told reporters. "Talks
are going on today, it can happen absolutely any moment."
Analysts said other issues, such as details over pipeline
construction, upstream equity participation for Chinese firms
and pre-payment, may have also contributed to the delay.
Chinese state media on Monday quoted Putin as saying that
preparations for a gas deal had entered "the final phase", while
Gazprom said at the weekend that it was "only one digit"
away from a deal.
It was not clear exactly what the "digit" referred to.
Gazprom's average 2013 gas sale price to Europe was $10.60
per million British thermal units (mmBtu) - the pricing standard
used in global gas trade. That works out at $380 per 1,000 cubic
metres according to the pricing convention used in Russia.
Industry sources have said Gazprom was hoping for $10-$11
per mmBtu from China. China is understood to pay $9 per mmBtu to
Turkmenistan, the former Soviet state in Central Asia that beat
Gazprom to the Chinese market.
Sources close to Gazprom and in the gas industry said the
company wanted China to pay $25 billion up front to secure
future gas supplies, which should start in 2018.
China has so far not been willing to commit, concerned that
other suppliers would seek similar deals.
Russia and China said in the joint statement that they would
strengthen cooperation in energy and infrastructure in Russia,
and would also step up financial cooperation and look to
increase trade in the rouble and the yuan currencies.
(Additional reporting by John Ruwitch and Kazunori Takada in
SHANGHAI, Chen Aizhu in BEIJING and Florence Tan and Jacob
Pederson in SINGAPORE; Writing by Fayen Wong; Editing by Mike