Russia claims Chinese gas deal "close"

By bne IntelliNews April 10, 2014

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Russia says its state gas giant Gazprom could finally sign off on a gas deal with China during President Vladimir Putin's planned trip to Beijing in May. Sealing an agreement after over a decade of stalling between the pair would boost Moscow's efforts to turn eastwards away from Western sanctions, but could come at a price.

With talks yet again going on between Gazprom and the Chinese government, Deputy Prime Minister Arkady Dvorkovich claimed the pair is close to sealing a deal that would also involve construction of a pipeline to carry 38bn cubic metres (cm) of gas per year. A start date for deliveries of 2019 has also been agreed, according to Vedomosti

Russia has been chasing a deal to supply its energy-hungry neighbour for years, as it would diversify its markets. Much has been made of Europe's heavy reliance on Russian gas in recent years - and that has accelerated during the Ukraine crisis - but by the same token, Russia is confined to serving European customers for the most part.  

"The sides are close to agreement," Dvorkovich said, according to Itar-Tass. "The only issue remaining is... the price. We really hope that the contract will be signed in May."

The price is right

A contract to supply China has been under discussion for at least ten years, but has persistently fallen at the last hurdle: pricing. Beijing - which buys huge volumes of gas from South America and around Pacific - is well known for its hardball negotiating tactics. Moscow, meanwhile, has baulked at dropping prices significantly below those it can earn in Europe.  

Gazprom claimed there has been progress at the talks on pricing, according to Reuters, but offered no details. It added that it expects a contract to come into force by the end of 2014. That would mark a victory of sorts for President Vladimir Putin, who has warned the West that attempts to isolate Russia over its annexation of Crimea will be resisted.

However, the devil will be in the details, with China clearly not unaware that the standoff between Russia and the US and EU strengthens its hand significantly. Tim Ash of Standard Bank suggests that "developments in Ukraine seem to have encouraged Russia to soften its previous position… Moscow had been pushing for a price about $400, but this might now be lower."

Moscow has over the years regularly claimed a deal with China is close, and signed off on various government level agreements on volumes and terms. However, a deal on price has never yet been reported to be close, let alone sealed.

VTB Capital appears underwhelmed by the claims for the time being, although admits geopolitics could offer added impetus. "We do not expect any market reaction," they write in a note. "but given the overall move in Russian policy towards the east, we now think the probability of a deal has increased. In our view, the most important parameters are the price (we believe the market expects to see it at the European netback level, i.e. $370-40/kcm) and whether there is a take-or-pay clause in the contract."

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