* Xi meets Putin on his first foreign trip, energy deals on
* China seeks to defend domestic firms with low gas price
* Gazprom needs higher price to cover cost of expanding into
* Deal possible by end 2013 if compromises made-analyst
By Melissa Akin and Chen Aizhu
MOSCOW/BEIJING, March 22 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
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 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
Mitrova estimates that a supply gap begins to emerge in
China in 2020 and rises to 66 billion cubic metres 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.
Gazprom, which puts up about a tenth of Russian budget
revenues and subsidises 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
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
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
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 metres
in 2030, more than four times the amount of gas it burned in
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
"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.
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
"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 finalised
during the second half of 2013."