* 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 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
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,
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
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
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