ST PETERSBURG, Russia (Reuters) - Russia’s top gas producer Gazprom (GAZP.MM) and China’s CNPC agreed on Thursday on basic terms of long-awaited gas supplies to China, paving the way for the final deal, which would cement Moscow’s footing in the world’s second largest economy.
The pressure on Gazprom to venture into the Chinese market is rising as its Russian rivals, such as Novatek (NVTK.MM), have already secured deals to supply China with gas from yet-to-build liquefied gas plants and are lobbying for limiting Gazprom’s export monopoly.
The former Soviet Union launched gas supplies to Western Europe in 1968 and the European Union has remained Gazprom’s key market, where the company generates 55 percent of its profit by covering a quarter of the bloc’s gas needs.
But cash-strapped European firms are increasingly seeking to wean off their energy dependence on the former cold war foe, looking for cheaper fuel, such as liquefied natural gas. Gazprom, on the other hand, has been involved in painstaking and so far fruitless talks about gas supplies to China, to diversify its deliveries away from Europe.
The basic terms, signed by heads of Gazprom and CNPC in the presence of presidents Vladimir Putin and Xi Jinping “define the volumes, start of deliveries, payments, ‘take-or-pay’ amendment” and other issues, Gazprom said in a statement. It gave no further details.
Gazprom first signed a memorandum of understanding with China in 2006 to ship up to 68 billion cubic meters of gas per year via two routes to the Asian country, later prioritizing the route which would take 38 bcm per year.
However, talks on finalizing a deal have been repeatedly delayed over numerous differences, including pricing.
Gazprom has said it aims to supply China with 38 bcm per year from its fields in East Siberia. That compares with 152 bcm it aims to supply to Europe this year.
In a statement on Thursday, Gazprom’s Chief Executive Alexei Miller said both companies now plan to sign the final supply deal by year-end, as it has been planned in the latest schedule.
Gazprom added that the price formula, usually linked to oil prices but may include a spot part to reflect more flexible liquefied gas market’s prices, would not be connected to the U.S. Henry Hub prices, which are typically lower than in the rest of the world.
In an interview with Reuters in June, Gazprom’s export Chief Alexander Medvedev said the company favored the regional oil-linked benchmark, the Japanese Crude Cocktail, for Chinese or other Asian gas deliveries.
Writing by Katya Golubkova; editing by Vladimir Soldatkin and James Jukwey