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Putin seen signing China gas deal as Ukraine crisis forces Russia’s hand

WILL KENNEDY and TARA PATEL

BEIJING (Bloomberg) -- Vladimir Putin is more likely to sign 30-year deal to supply pipeline gas to China next month after more than a decade of false starts because the crisis in Ukraine is forcing Russia to look for markets outside Europe.

While Putin and President Xi Jinping will make the final decision in Beijing next month, Russia’s need for new customers mean it’s pushing to complete a deal first mooted in 1997, a manager at gas-export monopoly OAO Gazprom and a government official said, asking not to be named because talks are ongoing. In China today, Russia’s deputy prime minister said he “hoped” a deal would be signed in May.

The crisis in Ukraine has increased the importance of Russia’s relationship with China, its largest trade partner outside the European Union and the only country in the United Nations Security Council not to censure its actions in Crimea. Until a China pipeline is built, Russia has few export markets for gas outside Europe, leaving it vulnerable to sanctions and competition from U.S. exports of shale gas.

“This time, Russia really may close the China gas supply deal considering that it’ll be more flexible on the price,” Ildar Davletshin, an oil and gas analyst at Renaissance Capital said by phone from Moscow. “China, too, needs this contract because the further use of coal is becoming unbearable in most developed parts of the country.”

Gazprom CEO Alexey Miller met China National Petroleum Corp. Chairman Zhou Jiping in Beijing today to discuss the terms of a deal. They’ll meet again in Moscow later this month before Putin travels to China on May 20, according to the Russian company’s statement.

“We hope to conclude the contract in May,” Deputy Prime Minister Arkady Dvorkovich said in Beijing today after meeting Chinese Vice Premier Zhang Gaoli, according to Itar-Tass news wire. “The Base price is the only problem to be solved.”

A CNPC press official didn’t answer a call seeking comment.

The gas-supply deal allowing the construction of the Power of Siberia pipeline across eastern Russia into China has foundered on price. To finance the $22-billion pipeline, Russia sought to match the rates it got for its gas in Europe, a level China hasn’t been willing to pay.

Miller said today he hopes a contract will be in force by the end of the year, according to the statement. “We advanced in our talks on the gas price,” he said.

Starting not earlier than end of 2018, Gazprom plans to supply as much as 38 Bcm of gas to China, about 24% of the company’s deliveries to Europe last year, which produced about $63 billion in export revenue, according to the company.

Gazprom needs the equivalent of about $13.50 per million British thermal units to profitably finance the pipeline and the development of Siberian gas fields to feed it, a total outlay of $90 billion, Maxim Moshkov, an energy analyst at UBS in Moscow, said by email. CNPC won’t want to pay more than $11 at the border, a price Gazprom may be forced to meet, cutting into future earnings, Moshkov said.

04/09/2014

 

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