China-Russia Gas Plan Lags

Russian leader's Beijing visit fails to break impasse.
An analysis by Michael Lelyveld
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Russian President Vladimir Putin meets with Chinese President Hu Jintao during a press conference in Beijing, June 7, 2012.
Russian President Vladimir Putin meets with Chinese President Hu Jintao during a press conference in Beijing, June 7, 2012.
The Yomiuri Shimbun

Russia has made no apparent progress on a landmark gas deal with China following a visit from President Vladimir Putin and six years of talks.

The agreement, potentially worth up to U.S. $27 billion per year, remains stuck over price terms despite rosy forecasts by some Russian officials.

While announcing no breakthroughs at the latest negotiations in Beijing on June 1, Deputy Prime Minister Arkady Dvorkovich predicted a deal "in a relatively short time," the official English-language China Daily reported.

But other officials were less optimistic before Putin's visit for meetings with Chinese leaders and the Shanghai Cooperation Organization summit on June 5-7.

"No documents will be signed on the corporate level," Gazprom CEO Alexei Miller said tersely before leaving the World Gas Congress in Kuala Lumpur, Malaysia for Beijing, Interfax reported.

There have been few signs of compromise on either side, said Kevin Jianjun Tu, director of the China energy and climate program at the Carnegie Endowment for International Peace in Washington.

"I would be very surprised if they can make progress in a relatively short timeframe because the disagreement on price has been a very sticky issue between Chinese national energy companies and their counterparts in Russia," Tu told RFA.

After Putin's meetings with President Hu Jintao and top Chinese leaders, the two sides announced a package of 17 signed agreements, but no gas pact was among them.

The two leaders have reportedly ordered specific proposals to break the logjam in time for a prime ministers' meeting in the fall.

Longest-running impasse

The energy deal would potentially be one of the world's largest, but the impasse has also been one of the longest- running.

In March 2006, Russia announced plans to build two pipelines from Siberia to deliver 68 billion cubic meters (2.4 trillion cubic feet) of gas per year to the fledgling Chinese market.

The first line through Xinjiang was planned to supply 30 billion cubic meters per year. Construction was expected to start in 2008 and be completed in 2011.

But the project never got off the ground because of China's resistance to Russian price demands and its priority for gas in the more developed east.

The latest reports from China Daily and the Kremlin news agency RIA Novosti suggest positions have barely budged in several years.

While Russia's Gazprom is said to be seeking European- level prices as high as U.S $400 per thousand cubic meters, China National Petroleum Corp. (CNPC) has only offered U.S $250 per thousand at most.

"The price difference has been quite substantial," said Tu. "It won't go away very soon."

One of the problems is the way the price gap developed.

In 2006, Russia launched its gas plans for China with a dual-purpose. It aimed to develop its East Siberian resources while arguing it could sell them in Asia if European markets resisted its price demands under an oil-linked formula that keeps gas rates high.

"Is Europe prepared to buy this gas?" Miller asked in 2006, the Associated Press reported at the time. "If not ... then we must correct our investment plans accordingly, both in terms of extraction and transportation."

Since then, gas markets have changed but Gazprom's demands have stayed largely the same. China has raised its domestic gas output to over 102 billion cubic meters last year and developed the Central Asia Gas Pipeline from Turkmenistan for imports.

Coastal cities are served by two West-East gas pipelines with a third under development, as well as port facilities for imports of liquefied natural gas (LNG).

Development of huge shale gas resources in the United States has already led to redirection of LNG cargoes to Europe and could start to boost world supplies in 2016, according to the U.S. Department of Energy.

But Gazprom continues to resist price cuts in Europe, making it hard to reduce price demands on China. How long it can hold the line is anyone's guess.

Four times the price

Although gas prices are high in the Asian market, Gazprom's rate for China is about four times the price in the United States.

CNPC is believed to be paying over U.S $300 per thousand cubic meters for Central Asian gas.

Officials have complained in the past that the company loses money on the imports because it is forced to sell at state-regulated prices. CNPC PetroChina lost 21 billion yuan (U.S. $3.3 billion) on gas sales last year, China Daily said.

But at least in Central Asia, China has some control over the supplies because of its investments in the region's pipelines and gas fields.

"China has some strategic considerations in this regard," said Tu, noting that the country would have no similar control over Siberian supplies. "I don't think they put gas imports from Russia as a very high priority."

In a report that appeared timed for Putin's visit, China Daily said CNPC has imported 30 billion cubic meters of gas from Central Asia since its pipeline from Turkmenistan opened in December 2009.

Supplies from the region accounted for 85 percent of China's gas imports last year, CNPC said.

Last month, state media reported that CNPC signed an agreement to allow private investment in the third West-East pipeline to coastal Fujian province. This, too, seems likely to be filled with Central Asian gas.

This month, Interfax reported that a third strand of the system from Turkmenistan is scheduled for completion through Uzbekistan in January 2015. Construction in Central Asia is racing ahead while talks with Russia drag on.

China has been negotiating with Russia on energy supplies since at least 2001 when the two countries signed a friendship treaty, but it has been able to get only limited investment access to Russian resources.

First pipeline

After a decade of talks and huge Chinese loans, Russia opened its first pipeline to China for oil deliveries in 2011 and now supplies a total of 546,000 barrels per day, according to customs figures. A similar deal for gas could take just as long.

"If we look at what's been going on for the past decade, the lack of trust between Russia and China has certainly served as a barrier between these two countries to move closer on a gas deal," said Tu.

One test of trust may be a report in Britain's Daily Mail that China Petroleum & Chemical Corp. (Sinopec) and China National Offshore Oil Corp. (CNOOC) are interested in buying a stake in Russia's TNK-BP oil company following a split with British giant BP.

But major investments in the Russian oil sector have been largely off-limits to Chinese companies in the past. If Russia turns away another Chinese investment, it could be a sign that a gas deal will not materialize for some time.

"This case could demonstrate whether Russia will show more willingness to work with Chinese national oil companies," Tu said.





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