Russia-China gas pact ‘snags on price’

Russian President Vladimir Putin, who is on a state visit to China this week, was widely anticipated to wrap up the proposed $400 billion pact to supply state-owned China National Petroleum Corporation with 38 billion cubic metres of gas per annum over a 30-year period.

Russia is seeking to divert more of its gas supplies to energy-hungry Asian markets as demand in Europe has been hit both by economic recession and the political stand-off over Ukraine, with European countries now looking to cut their reliance on Russian gas.

At the same time, China’s gas consumption is forecast to more than double by the end of the decade as Beijing seeks to switch from pollutive coal to cleaner fuels in its power generation sector.

However, negotiators from both countries have so far been unable to agree on a price for gas supplies to China, preventing a deal from being signed, Putin’s spokesman Dmitry Peskov was quoted as saying by Reuters in Shanghai.

“The visit is not over yet. Talks will continue… substantial progress is reached but there is still work to do on price. Talks are going on today, it can happen absolutely any moment,” he said.

The failure to secure a deal sent Gazprom shares down 1.74% in early trading in Moscow on Tuesday.

The impasse, despite talk of a narrowing price gap, implies China is driving a hard bargain to secure a lower price.

Regional head of oil and gas research at Nomura Research, Gordon Kwan, said: “Despite all the talk out of Russia, despite their desperation, China has the upper hand.

“China wants to really squeeze the price lower. China has other options such as the gas project in Sichuan and North American liquefied natural gas. I think it will be a mistake by Russia if they couldn’t agree on a deal just because of the price.”

Chinese state media had quoted Putin as saying at the weekend that preparations for the gas supply agreement had entered “the final phase”, while Gazprom said it was “only one digit” away from a deal.

However, sources close to Gazprom and in the gas industry said the Russian company wanted China to pay $25 billion up front to secure future gas supplies, which should start in 2018.

China has so far not been willing to commit, concerned that other suppliers would seek similar deals.

There is still a chance the two sides could reach an agreement before Putin leaves China on Wednesday or, more likely, in time for an economic forum in St Petersburg later this week.

Putin did though gain a rare nod of support over the Ukraine crisis from Chinese President Xi Jinping, with the countries issuing a joint statement calling for a de-escalation of tensions and for “peaceful, political ways to resolve existing problems”.

Russia is facing growing isolation in the West over its annexation of Crimea from Ukraine and is also accused of fomenting pro-Russian protests in eastern Ukraine.

In the joint statement, Russia and China also pledged to strengthen co-operation in energy and infrastructure in Russia, as well as step up financial ties and increase trade in the rouble and other currencies.