Gas Deal Delayed Again

Russia fails to seal an export agreement with China after years of talks.
By Michael Lelyveld
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gazprom305.jpg Russian PM Vladimir Putin meets with Chinese President Hu Jintao at Gazprom headquarters in Moscow, June 16, 2011.

China and Russia have missed another deadline for agreeing on a major gas deal, raising doubts about ambitious plans for a pipeline from Siberia to Xinjiang.

After years of negotiations, officials conceded that monopoly Gazprom had failed to reach an agreement on gas sales to China National Petroleum Corp. (CNPC) in time for President Hu Jintao's visit to Russia on June 15-18.

"This time we won't be signing anything," Gazprom deputy CEO Alexander Medvedev told reporters during Hu's visit, according to Interfax.

Russian officials insisted the latest setback was no big deal, despite months of predictions that the two sides would wrap up a decade of talks between the world's top gas exporter and its largest energy consumer next door.

"The negotiations are continuing. This isn't haggling at a bazaar," Russian Energy Minister Sergei Shmatko said. "There is no need for haste."

But haste would hardly describe the pace of talks since 2006, when Russia announced plans to supply China with 68 billion cubic meters (2.4 trillion cubic feet) of gas per year through eastern and western pipelines that have yet to be built.

Gazprom has since focused on delivering 30 billion cubic meters through a 2,600-kilometer (1,615-mile) western line across the Altai Mountains to Xinjiang by 2015, although China has made clear it would prefer the eastern route for its coastal markets.

The major sticking point between the two countries has been price, with Russia demanding more than China wants to pay. The difference between China's bid and the asking price has been U.S. $100 (650 yuan) per thousand cubic meters or more.

After months of reports that the two sides were coming closer together, officials conceded during Hu's visit that they were still far apart.

'No hurry'

Analysts say China has no intention of meeting Russia's demands for European-level prices as it struggles against inflation and resists raising retail energy rates.

"They don't urgently need the gas. There's no hurry," said Stephen Blank, research professor of national security affairs at the U.S. Army War College Strategic Studies Institute.

China has already sealed agreements to buy at least 40 billion cubic meters (1.4 trillion cubic feet) of gas per year from Turkmenistan, which has supplied smaller amounts through the 2,000-kilometer (1,240-mile) Central Asian Gas Pipeline to Xinjiang since it opened in 2009. Some estimates suggest that China's imports from Central Asia will more than double that volume in coming years.

Gazprom believes a deal is still "very close," but Blank argued that China can do without Russian gas. The country is developing its own resources and has access to imported liquid natural gas (LNG) on the open market.

China hopes to raise the share of cleaner-burning gas in its energy mix from about 3 percent to 10 percent by 2020, according to the U.S. Department of Energy, but its major fuel remains domestically produced coal.

"Gas is not the main issue for their economy. Oil is more important, and they've got plenty of coal. So, no, they don't need it right away," said Blank.

Russia missed a similar self-imposed deadline for signing contracts with China in 2009.

Pricing problems

China has invested heavily in gas since it launched construction of its giant West-East Pipeline from Xinjiang to Shanghai in 2002. But problems persist with pricing the more expensive fuel for power generation, where it competes with cheaper coal.

With inflation running at 5.5 percent in May, the National Development and Reform Commission (NDRC) faces a squeeze between energy costs and price controls. But Gazprom continues to be bullish on China's energy demand.

Russia and China have yet to settle a range of other issues aside from price, including minimum volumes and delivery dates, Interfax said, making it seem that an agreement is still far off.

But price is still the major problem. China has offered no more than U.S. $235 per thousand cubic meters, while Gazprom has demanded U.S. $350, the official English-language China Daily said.

Meanwhile, Gazprom has repeated earlier forecasts that Russia's prices in long-term contracts for Europe will climb to U.S. $500 per thousand cubic meters by the end of the year under an oil-linked formula, putting pressure on China to strike a deal now.

Even though the deal with Russia would be for deliveries starting in 2015, an agreement for high-priced imports could encourage Central Asian producers to demand more.

Last year, NDRC Vice Chairman Zhang Guobao was quoted as saying that China's price for Central Asian gas is U.S. $200-210 per thousand cubic meters. Even at that price, CNPC has complained of losses because of controlled retail rates.

A higher-priced Russian deal could also motivate domestic gas producers to slow down production in hopes of making more from their resources later on. The NDRC has already faced that problem with rising coal prices and lagging deliveries this year.

The impasse on imports from Russia appears to be the result of two very different views of the Chinese market, said Philip Andrews-Speed, an energy expert based in Edinburgh, Scotland.

"It appears the Chinese are confident that they don't need or cannot use the additional gas from Russia, given that they are signing new LNG contracts and hope to keep increasing import capacity from Central Asia," he said.


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