Russia's Gazprom Misses China Gas Target

An analysis by Michael Lelyveld
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gazprom-june-2013.jpg Gazprom CEO Alexei Miller attends the company's annual meeting in Moscow, June 28, 2013.

Russia's Gazprom has missed a target date for finalizing terms of a major China gas supply contract while its competitors have been charging ahead with new China deals.

On June 19 in St. Petersburg, Gazprom CEO Alexei Miller voiced hope that the Russian monopoly would nail down terms for exporting large volumes of pipeline gas to China in September.

"I think it can be said in September we could achieve the signing of the basic terms of the contract," Miller said after talks with China National Petroleum Corp. (CNPC), Interfax reported.

The statement was at odds with predictions in March that the agreement on terms for the export deal would be sealed in June.

"The parties plan to sign legally binding principal terms and conditions of the contract in June this year and sign the long-term contract by the end of the year," Miller said on March 22 in Moscow during the visit of Chinese President Xi Jinping, also according to Interfax.

Long-pursued deal

If the timing has slipped, it would not be unusual. Gazprom has been pursuing a China gas deal since at least 2004.

Deadlines have come and gone since 2006, when Gazprom unveiled plans to pump up to 68 billion cubic meters (2.4 trillion cubic feet) of gas per year through twin pipelines from Siberia to China from the east and west.

Although China repeatedly shunned the idea of a Russian gas route through Xinjiang, Gazprom only agreed to shelve it late last year.

Instead, it has now focused on the eastern route that China always wanted to serve the coal-fired industries of its smokey northeast.

The line would carry 38 billion cubic meters (bcm) of gas per year, although Gazprom has pressed for expanded exports of up to 60 bcm and additional sales of liquefied natural gas (LNG).

Pricing disputes

But after Miller's latest statement, even Gazprom officials admitted the timetable was little more than a wish because of pricing disputes.

In a Reuters interview, Gazprom Export CEO Alexander Medvedev said Miller's new deadline was only an expression of hope that "thinking makes it so."

While Gazprom has compromised on the routes, it still insists that exports to China should be just as profitable as its European sales.

China has refused to sign a 30-year contract based on European prices, arguing it is still a developing country.

Despite Miller's claims of progress, the issue has kept the two sides at loggerheads for years.

Cycle on repeat

Edward Chow, senior fellow for energy and national security, at the Center for Strategic and International Studies in Washington, said the same cycle between Gazprom and China has been repeated over and over again.

"Gazprom says they are coming closer on pricing with the Chinese and should have a definitive agreement signed very soon," said Chow. "Haven't we heard this all before?"

Chow also discounted Miller's claims that the sides had agreed not to link prices for China to the much lower rates of the U.S. spot market, arguing the issue was irrelevant.

"Bringing up the red herring of not being tied to U.S. spot prices just demonstrates how little progress there has been on price negotiations," he said.

Prepayment deal

Miller indicated in March that Gazprom was angling for a large up-front payment from China. But Chow said the demand may only delay the deal further.

"Advance payments merely complicate the pricing issue without necessarily resolving it, since the two sides still have to agree on the time value of money," Chow said.

Gazprom's Medvedev denied reports that a prepayment deal has been reached.

"When we agree on the price, we will agree on prepayment," he said.

Rosneft, Novatek deals

Meanwhile, Gazprom's rivals in the Russian energy industry announced a flurry of deals with China at the St. Petersburg International Economic Forum. The agreements may grant greater access to Chinese investment and challenge Gazprom's status at the same time.

Most significantly, Russia's state-owned Rosneft oil company signed a 25-year contract that would more than double its annual oil exports to CNPC, as outlined during Xi's trip in March.

The agreement calls for supplying 365 million tons (2.6 billion barrels) of oil valued at U.S. $270 billion (1.66 trillion yuan), Russian and Chinese news agencies said.

The deal is said to include a substantial prepayment, variously reported as U.S. $30-60 billion. The companies have not officially verified the prepayment or the amount.

CNPC also reached a preliminary agreement to buy a 20-percent stake in the Yamal LNG project of independent Russian producer Novatek, which would export liquefied gas from the Russia's Arctic region.

As part of the deal, CNPC would buy at least 3 million tons of LNG per year, said Novatek CEO Leonid Mikhelson, according to Interfax.

The agreement relies on a change in Russian government policy which has given Gazprom a monopoly over gas exports until now.

Companies including Rosneft and Novatek have been pushing to gain export rights, at least for LNG.

At the St. Petersburg forum, President Vladimir Putin reportedly agreed to open the market for LNG exporters, leaving Gazprom's monopoly over pipeline exports intact.


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