ST PETERSBURG, Russia (Reuters) - Russia’s top gas producer Gazprom (GAZP.MM) and China’s CNPC came closer on Thursday to a strategic deal to ship gas to China, agreeing on basic terms but not on price - a cornerstone issue for years.
Pressure is increasing on Gazprom to venture into the Chinese market as Russian rivals such as Novatek (NVTK.MM) secure deals to supply China from yet-to-build liquefied gas plants and lobby the government to limit Gazprom’s gas export monopoly.
The terms, signed by heads of Gazprom and CNPC in the presence of Presidents Vladimir Putin and Xi Jinping on Thursday “define the volumes, start of deliveries, payments, ‘take-or-pay’ amendment” and other issues, Gazprom said in a statement. It gave no further details.
“Parameters were agreed, so it’s only left to agree on the price. Hope it will happen soon,” Dmitry Peskov, a spokesman for Putin, told a briefing.
Gazprom has been in talks with Beijing for years as it seeks to diversify its customers away from Europe, but China, the world’s top energy user, has proved to be a tough negotiator, demanding a steep discount to prices paid by Western utilities.
The average gas price for Europe in long-term contracts Gazprom negotiates this year is expected to be around $370-$380 per 1,000 cubic meters, down from $402 last year.
Sources has said CNPC has dug in at $250 as it aims to preserve a cost advantage that makes Chinese producers more competitive in the world.
“The key question remains - what’s the discount to the European gas price? I think it could be close to 30 percent, given that China has access to other supplies,” Andrey Polischuk, an analyst with Raiffeisen bank, said.
Gazprom’s contracts typically tie gas prices to oil prices but they can include a segment based on the more flexible spot prices in the liquefied natural gas market.
Gazprom said any price agreement with China would not be connected to gas prices at the U.S. Henry Hub, which are typically lower than in the rest of the world.
In an interview with Reuters in June, Gazprom’s export head, Alexander Medvedev, said it favored an oil-linked benchmark, the Japanese Crude Cocktail, for Chinese or other Asian gas deliveries.
In a statement on Thursday, Gazprom Chief Executive Alexei Miller said the company and CNPC now plan to sign the final supply deal by year-end.
Since 2004, when Gazprom and CNPC signed a strategic cooperation agreement, China has turned to Turkmenistan for gas supplies, becoming the main importer of its gas.
Last year, it took 20 bcm via a pipeline commissioned in late 2009, and it has reached agreements to increase that volume to 65 bcm by 2020.
Gazprom had initially planned to ship up to 68 billion cubic meters of gas per year via two routes to China. It later prioritized a route that would supply 38 bcm per year with a plant to start in 2018.
That compares with 152 bcm it aims to supply to Europe in 2013, its biggest export market. But Europe also is looking for cheaper alternatives as it seeks to reduce dependence on Russian gas supplies.
To ship 38 bcm annually to China, Gazprom would have to build a new pipeline at an estimated cost of $38 billion, which could be financed via loans-for-gas deals.
Additional reporting by Denis Pinchuk and Douglas Busvine; Writing by Katya Golubkova; editing by Vladimir Soldatkin and Jane Baird