November 10, 2014 / 12:31 PM / 3 years ago

Russia signs second China gas deal, but falling prices raise doubts

Russia's President Vladimir Putin (L), in traditional Chinese-style outfit, shakes hands with China's President Xi Jinping as Xi's wife Peng Liyuan stands beside, during the APEC Welcome Banquet, at Beijing National Aquatics Center, or the Water Cube in Beijing, November 10, 2014.Kim Kyung-Hoon

MOSCOW/BEIJING (Reuters) - Russia and China signed a framework agreement for a gas supply deal at the weekend, but falling energy prices weighed on negotiations and may still put paid to their plans.

Moscow is keen to develop ties with Asia to underline its independence from the West, which has imposed sanctions over Russia's role in the Ukraine crisis that have limited development of its energy reserves and its ability to raise finance abroad.

Visiting Beijing, Russian President Vladimir Putin and Chinese leader Xi Jinping held up a memorandum for a gas route from Russia to China as a sign of closer cooperation.

Top Russian gas producer Gazprom (GAZP.MM) hopes to ship 30 billion cubic meters (bcm) of gas a year under the agreement, on top of a deal agreed in May to supply China with 38 bcm a year after 2018.

Moscow appeared to be sending a message to Europe, its biggest export market, that it has alternative buyers. Such a move is also important for the state budget, given that oil and gas account for half of its revenue.

But the memorandum was non-binding. Those privy to the talks said the drop in oil prices of about a third since mid-June, which is also depressing gas prices, had complicated the talks.

Lower prices may undercut the ability of Gazprom to invest in the infrastructure needed to carry the gas to China, while handing Beijing a weapon in negotiations on price.

"It remains challenging to finalize that deal – again on the pricing of gas. The current falls in oil prices would make the price talks tougher. China would hope for lower gas prices (at the border) versus eastern as it's a longer journey to reach the consumers," said Zeng Xingqiu, industry veteran and an adviser to China National Petroleum Corporation.

He added, however, that the agreement "should have some positive impact on China-Russia energy cooperation".

Price Tag

Analysts say that China, which is aiming to more than double gas consumption in its energy mix by 2030 to tackle air pollution, has lots of options in securing gas volumes, including from ex-Soviet republic Turkmenistan.

China also plans to develop its own shale gas resources, believed to be world's largest.

"It is prudent for China to line up as much supply as it can, and this is the last peg of something they have been talking about since the early 1990s," said Tony Regan at Singapore energy consultancy Tri-Zen International.

"(China) also has the last card. It has to agree on price, and it can prevaricate for as long as they want if they don't want to start it too soon."

China and Russia have been discussing two gas pipeline routes from eastern and western Siberia since the early 1990s, and in May they agreed to pump gas via the eastern route.

Gazprom has estimated its sales from the eastern route over 30 years will amount to $400 billion, but the collapse in oil prices may cut that figure.

"The price of Russian gas is linked to that of oil. Since May, the value of the Chinese contract shrank to $300 billion. The low price of oil complicates the price negotiation," said Mikhail Korchemkin, a director of U.S.-based consultancy East European Gas Analysis.

That compares with an estimated $55 billion needed to develop east Siberian gas fields and build the Power of Siberia pipeline to China.

The price of Russian gas was also the major obstacle in talks for the eastern deal before it was agreed in May.

Additional reporting by Katya Golubkova in Moscow and David Stanway in Beijing; editing by Elizabeth Piper and Jane Baird

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