Russia, China fail to reach 30-year gas supply deal

Reuters News
Posted: Jun 17, 2011 5:48 AM
Russia, China fail to reach 30-year gas supply deal

By Ben Blanchard

ST PETERSBURG, Russia (Reuters) - Russia failed to agree on a 30-year gas supply deal with China in time for signing on Friday because of differences over the price of a deal, which could be worth up to $1 trillion.

Russian President Dmitry Medvedev and Chinese President Hu Jintao had hoped to sign the deal, which would help power Beijing's booming economy and allow Moscow to diversify exports away from Europe, at an investment forum in St Petersburg.

Russian officials said talks were expected to continue. Hu, speaking at the official opening of the forum, appeared to play down the dispute without mentioning it directly.

"To lend new impetus to our economic growth, we will deepen mutually beneficial cooperation in investment, energy, nuclear energy, aerospace ... in particular we will expand cooperation in new energy ...," he said.

Russian Energy Minister Sergei Shmatko also sounded upbeat on the prospects for eventually reaching an agreement between Russian state-controlled gas export monopoly Gazprom and China National Petroleum Corp (CNPC).

"There should be no rush. We had a good chance to sign a deal during President Hu Jintao's visit to Russia, but both sides must show flexibility," he told reporters. "We expect talks to continue."

A source close to the talks said the two sides had not been able to close the gap on price terms, with the Chinese seeking a fixed price and the Russians pushing to uphold the oil market link that underpins Gazprom's existing export contracts.


The failure to get the deal over the line came after five years of talks between Russia, the world's largest energy producer, and China, the largest consumer.

The deal would have foreseen Russia exporting up to 68 billion cubic meters of gas per year to China, compared to expected export volumes to Europe of more than 150 billion cubic meters this year.

"It is good that we are holding these talks at the top level, which signals that everything is going to be fine," said Deputy Prime Minister Viktor Zubkov, who is also Gazprom's chairman, predicting a "viable" result.

Hu has courted Russia as a way of boosting energy security as robust economic growth increasingly forces China to look abroad for oil and gas.

For Russia, the deal would offer Gazprom an alternative market, assuaging Prime Minister Vladimir Putin's concern of over-reliance on European customers.

But while Hu has made securing energy for the world's second-biggest economy a diplomatic priority, relations with Russia have not been smooth.

Negotiations have long been stuck on the issue of price, with Gazprom saying it will not accept a lower effective price than it receives from its core European customers.

Negotiators for CNPC have signaled that they will pay no more than $250 per thousand cubic meters, sources at Gazprom said on Wednesday.

Russia's gas export monopoly is still targeting a price that will make deliveries to China as profitable as those to European clients, who Gazprom says will pay $500 per thousand cubic meters in the fourth quarter of this year.


Industry officials and analysts said that, given the wide differences on price, political will alone was insufficient to get the deal done, with Russia concerned that offering easy terms to China would undermine its market position in Europe.

"The difference on price was huge," said Mikhail Slobodin, executive vice-president for gas at TNK-BP. "China is very pragmatic. It doesn't matter about the visit of the Chinese president -- it's a question of economics."

Zha Daojiong, a professor of international relations at Peking University, said it was not surprising a deal proved elusive given the complex interests at stake, but the sides would keep talking.

"The deal is not off. In an absolute material sense, China will need Russian gas," Zha said.

Under early terms agreed over five years by negotiators, Russia would deliver 30 bcm per year from fields on the Arctic Yamal peninsula, the same fields which supply Europe -- via pipeline through the Altai region to northern China.

China would also like to contract an additional 38 bcm from yet untapped fields in East Siberia.

The combined income over three decades, assuming a price of $500 per thousand cubic meters, would generate some $1 trillion.

Warming political ties and unity in public on international issues make a smooth foundation for trade talks but are barely a factor in tough deal-making, said Fyodor Lukyanov, editor of the journal Russia in Global Affairs.

"China takes a very consistent position that politics is politics and economics is economics," he said.

(Reporting by Jessica Bachman and Steve Gutterman in Moscow, Douglas Busvine and Alexei Anishchuk in St Petersburg, and Chris Buckley in Beijing; Writing by Timothy Heritage and Douglas Busvine)