Russia Says Long-Sought China Gas Supply Deal Is Close

By Katya Golubkova & Vadimir Soldatkin 10 April 2014

MOSCOW — Russia said on Wednesday it was close to signing a deal to sell natural gas to China, a long-sought agreement which President Vladimir Putin could use to show Western sanctions over Crimea cannot isolate his country.

The deal is the Holy Grail for Russia after at least 10 years of talks and Moscow hopes it can be signed when Putin visits China next month.

There was no immediate comment by China, whose negotiating position has been strengthened by Western threats to impose more sanctions on Russia if Moscow sends its armed forces into eastern Ukraine following its annexation of Crimea.

As talks between state-controlled Gazprom and Chinese officials continued in China, Arkady Dvorkovich, a deputy prime minister, said the sides were close to sealing a deal that would also involve construction of a pipeline to carry 38 billion cubic meters (bcm) of gas a year.

“Regarding Gazprom’s gas contract, the sides are close to agreement … The only issue remaining is … the price,” he was quoted as saying by Itar-Tass news agency in Beijing. “We really hope that the contract will be signed in May.”

Gazprom said separately that there had been progress at the talks on the price China would pay for the Russian gas and that it expected the contract to come into force by the end of 2014. It gave no further details of the negotiations.

Industry sources said before the latest round of talks that Gazprom could try to secure a deal by proposing a lower price for the gas in exchange for China handing over billions of dollars in upfront payments.

The sources said Gazprom was hoping for a price of $10-$11 per mmBtu (million British thermal units) from China. China is believed to pay $9 per mmBtu to Turkmenistan, the former Soviet state in Central Asia that beat Gazprom to the Chinese market.

The deal would help Gazprom reduce its dependency on exports to Europe, which gets around a third of its gas needs from Russia. Half of this amount comes via Ukraine, which is at odds with Moscow over gas payments as well as being locked in a political standoff over the Crimea region.

Ukraine owes Gazprom $2.2 billion for gas and failed to meet a deadline this week for paying its March gas bill.

Russian Prime Minister Dmitry Medvedev told a government meeting there were grounds to make Kiev pay in advance for its gas, but Putin suggested holding off on such a move for now.

Gazprom has increased the gas price for Ukraine by 80 percent since the neighboring former Soviet republic ousted Moscow-backed President Viktor Yanukovich on Feb. 22 and installed a Westward-looking government.

Kiev said the price rise was a politically motivated move to punish it for pursuing closer ties with the European Union.

Russia Looks East

The crisis in relations with Kiev has made bypassing Ukraine by using different pipelines, or reorienting trade to the East, priorities for Putin, and Russia has been working hard to develop relations with Asia.

Russia’s desire to find new markets has also strengthened Beijing’s negotiating position on the price at talks involving China National Petroleum Corp.

Gazprom has been in painstaking talks over the last 10 years about shipping gas to China and has been unable to agree on pricing.

Russia ships around 16 percent of its crude exports to Asia, while gas volumes are small, limited only to super-cooled seaborne gas.

By 2035, Moscow plans to double the share of oil flows and send a third of its gas exports eastwards, though its plans are constrained by the lack of necessary infrastructure.

Russia, which extracted an average 10.56 million barrels of oil per day last month, exports around 4.4 million bpd of oil in total. It is gradually reducing west-bound flows in favour of Asia.

Sanctions imposed on Russia over its annexation of Crimea are mainly limited to individuals but the EU has stepped up discussion of options to reduce its dependence on Russian energy.

Russian Energy Minister Alexander Novak said on Wednesday that Moscow planned to expand its East Siberia-Pacific Ocean pipeline to 80 million tonnes (1.6 million barrels per day) by 2020, as part of plans to diversify away from Europe.