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Russia, China may sign gas deal later in year amid wrangling

Bloomberg  |  Moscow 

Russia and China may delay a natural-gas accord until later this year as wrangling continues over how much China needs to pay the world’s largest energy exporter for the fuel.

Chinese President Hu Jintao is in Russia for a four-day visit and had been expected to sign a gas-supply agreement with his Russian counterpart Dmitry Medvedev, Assistant Foreign Minister Cheng Guoping said.

“Even if the final agreement is not reached during Hu’s visit, I am rather sure that during this year the arrangement will be reached,” OAO Gazprom’s Deputy Chief Executive Officer Alexander Medvedev told Bloomberg TV today at the St Petersburg International Economic Forum. “Often when you are very close it is not easy to make the last step.”

Russia is targeting foreign gas sales beyond its existing European markets and China is looking to diversify its providers. During price negotiations, Russia may be counting on Japan’s nuclear disaster boosting demand for fossil fuels, while China may use supply options across central Asia as leverage.

“It’s inevitable that Russia will become the most important supplier of natural resources into China,” Roland Nash, chief investment strategist at Verno Capital, a Moscow hedge fund that manages about $140 million, said by email. “The problem is both countries believe they hold the better bargaining position.”

Hu will join executives including Deutsche Bank Chief Executive Officer Josef Ackerman, Citigroup CEO Vikram Pandit and BP Plc CEO Robert Dudley at the St Petersburg forum.

Russia is pursuing energy sales to Asian countries, including Japan. The government in Moscow pledged to supply China with all the natural gas it needs, Deputy Prime Minister Igor Sechin said during President Dmitry Medvedev’s visit to Beijing in September.

China, Russia’s biggest trading partner with total volume jumping 50 per cent to $59 billion last year, wants to triple its gas consumption by 2020 to keep pace with its economy, which expanded an annual 9.7 per cent in the first quarter.

Differences over pricing between Gazprom and China National Petroleum Corp (CNPC), the parent of PetroChina Co, have delayed plans to build the gas pipelines for more than a decade.

“The hold-up has simply been price,” Neil Beveridge, a Hong Kong-based analyst at Sanford C Bernstein & Co, said on Bloomberg TV. “Russia wants a European net-back for the price of Russian gas going to China. China’s view is, without the Chinese market, this gas is going nowhere and they should be getting a discount for it.”

As countries such as Germany cool toward nuclear power after the Fukushima plant disaster, Gazprom CEO Alexei Miller has sought prices equivalent to those his company receives in Europe, where it accounts for a quarter of supplies. China should pay market prices for Russian gas, Gazprom’s Medvedev said today.

China has pushed for lower rates similar to those charged on its domestic energy market after obtaining piped supplies from Turkmenistan and imports of liquefied natural gas, or LNG, from countries including Yemen and Australia. It’s also planning to develop its own shale gas.

“Gazprom is looking at potentially higher demand from Germany and Japan,” Alex Brideau, an analyst at political consultancy Eurasia Group, said in an emailed note June 15. “From the Chinese viewpoint, increased domestic production, piped gas from Central Asian producers and more LNG availability give CNPC more options and less incentive to agree.”

Gazprom plans to provide Siberian gas through two pipelines from as early as 2015, with total annual deliveries to reach 68 billion cubic metres, more than 60 per cent of China’s 2010 consumption, according to BP Plc’s Statistical Review of World Energy.

The gas deal would follow Russia’s 2009 agreement to supply China with crude oil for 20 years in return for $25 billion of loans to state energy companies.

“I don’t think we will manage to finally agree on the price,” said Sergei Sanakoyev, head of the Russian-Chinese Center of Trade and Economic Cooperation in Moscow. “Price aside, we can sign a political agreement that a pipe will be constructed.”


In addition to energy cooperation, Chinese companies from the construction, machine-building and railways industries will join Hu in St Petersburg after an April visit by Medvedev to China yielded “dozens” of cross-border deals, Sanakoyev said.

Russia wants to use the St Petersburg forum to attract foreign investment and boost growth closer to the pace of India and China. Foreign direct investment totalled $3.9 billion in the first quarter, compared with $60 billion-$70 billion before the global economic crisis, while gross domestic product expanded 4.1 per cent.

Russia, which remains hopeful of joining the World Trade Organization (WTO) this year wants to lure foreign capital with a $10 billion fund to co-finance international investment and has targeted innovative industries to wean the economy off its dependence on energy exports.

Medvedev and Hu will discuss joint investment and cooperation in industries including aerospace and defence, the Russian president’s chief foreign policy aide Sergei Prikhodko told reporters in Moscow last week.

Russia is also keen to lure Chinese partners to Skolkovo, the Moscow suburb Medvedev has championed as the country’s “Silicon Valley” for developing new technologies.

Hu’s speech tomorrow will likely be the highlight in St Petersburg, underlining the growing influence of the BRIC nations at an event that will once again feature the heads of international energy companies including BP, Total and Statoil.

“Interest toward China is on the rise and the forum is becoming a more authoritative platform,” Prikhodko said.

First Published: Fri, June 17 2011. 00:11 IST