China set to be Gazprom's main customer

By bne IntelliNews November 10, 2014

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Deliveries of Russian gas to China could overtake those to Europe, making China the main customer of Russia's state gas giant Gazprom.  This will be the result if a mooted "western route" gas pipeline is built, Gazprom CEO   said on Sunday in Beijing during the Asia-Pacific Economic Cooperation (APEC) summit in Beijing. 

Russia and China signed a package of 17 documents, including the framework deal between Gazprom and China's energy giant CNPC to deliver gas to China via the western route pipeline. The 'western route' pipeline will run through Russia's West Siberian region of Altai to north-west China and supplement the East Siberian 'Power of Siberia' pipeline agreed between China and Russia in May.

Miller said that "taking into account the increase in deliveries via the 'western route', the volume of supplied [natural gas] to China could exceed European exports in the mid-term perspective."

The pricing formula for Russian gas supplies to China vie the "western route" pipeline will include a take-or-pay contractual obligation,  Miller also said, providing Gazprom with assurances about the volume of gas that will be shipped via the pipeline.

The western route supplies would almost double the 38bn m3 annual gas supplies under the major $400bn 30-year 'Eastern Route' deal closed between Gazprom and CNPC in May. Should the second route be negotiated, with 68bn m3 annually as of 2018 China would become the largest buyer of Russian natural gas, surpassing Germany with about 40bn m3. Total gas supplies to Europe in 2013 were about 160bn m3.

After signing a memorandum in 2004 the “Eastern Route” deal was negotiated for over a decade and was finally closed on Vladimir Putin’s visit to China on May 20 amid the sharp deterioration of relations with Gazprom’s European clients.

According to May's historic agreement worth $400b, Russia is to deliver 30bn of cubic meters over a span of 30 years to China, via the East Siberian pipeline.

Construction on the eastern pipeline, called 'Power of Siberia' started in September, according to Gazprom.

Miller said however that Gazprom would not receive advance payments for gas from China to fund the pipeline construction. He explained that negotiating an advance payment from China would involve providing a rebate on the price of gas to be supplied, which Gazprom does not wish to do.

Instead Gazprom will take out loans to fund pipeline construction, Miller said. Analysts see Gazprom as likely to draw part of the estimated over $55bn needed for the pipeline from the state infrastructure investment fund, the National Wealth Fund, thus competing with national oil company Rosneft and other major projects which have filed bids for the funds. Gazprom will however raise funds from banks as well, and possibly take out loans from China, Miller said at the press conference.

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