Bloomberg News

Russia, China May Sign Gas Deal Later in Year Amid Wrangling

June 16, 2011

(Updates with end of Hu-Putin meeting in paragraph seven.)

June 16 (Bloomberg) -- Russia and China may delay a natural-gas accord until later this year as they wrangle over how much China needs to pay the world’s largest energy exporter for the fuel.

Chinese President Hu Jintao is in Russia for a four-day visit and had been expected to sign a gas-supply agreement with his Russian counterpart Dmitry Medvedev, Assistant Foreign Minister Cheng Guoping said yesterday.

“Even if the final agreement is not reached during Hu’s visit, I am rather sure that during this year the arrangement will be reached,” OAO Gazprom’s Deputy Chief Executive Officer Alexander Medvedev told Bloomberg TV today at the St. Petersburg International Economic Forum. “Often when you are very close it is not easy to make the last step.”

Russia is targeting gas sales beyond its existing European markets and China is looking to diversify its providers. During price negotiations, Russia may be counting on Japan’s nuclear disaster boosting demand for fossil fuels, while China may use supply options across central Asia as leverage.

The supply deal envisages construction of pipelines and long-term delivery contracts. It would give China “stability and the opportunity to plan,” while providing Russia with access to a growing market and stable prices, President Medvedev said after meeting with Hu today in Moscow.

Energy Cooperation

Natural gas “is an important component of Russia-China cooperation,” said the Chinese leader, who will join executives including Deutsche Bank AG Chief Executive Officer Josef Ackerman, Citigroup Inc. CEO Vikram Pandit and BP Plc CEO Robert Dudley at the St. Petersburg forum.

Hu and Russian Prime Minister Vladimir Putin met this evening at Gazprom’s headquarters in Moscow.

Russia is pursuing energy sales to Asian countries, including Japan. The government in Moscow pledged to supply China with all the natural gas it needs, Deputy Prime Minister Igor Sechin said during Dmitry Medvedev’s visit to Beijing in September.

China, Russia’s biggest trading partner with total volume jumping 50 percent to $59 billion last year, wants to triple its gas consumption by 2020 to keep pace with its economy, which expanded an annual 9.7 percent in the first quarter.

Russia and China are seeking to boost bilateral trade to $200 billion a year by 2020, the countries’ presidents said today. Differences over pricing between Gazprom and China National Petroleum Corp., the parent of PetroChina Co., have delayed plans to build the gas pipelines for more than a decade.

Price Hold-Ups

As countries such as Germany cool toward nuclear power after the Fukushima plant disaster, Gazprom CEO Alexei Miller has sought prices equivalent to those his company receives in Europe, where it accounts for a quarter of supplies. China should pay market prices for Russian gas, Gazprom’s Medvedev said today.

China has pushed for lower rates similar to those charged on its domestic energy market after obtaining piped supplies from Turkmenistan and imports of liquefied natural gas, or LNG, from countries including Yemen and Australia. The Asian nation, which today agreed to boost gas transit through Kazakhstan, is also planning to develop its own shale gas.

“Gazprom is looking at potentially higher demand from Germany and Japan,” Alex Brideau, an analyst at political consultants Eurasia Group, said in an e-mailed note June 15. “From the Chinese viewpoint, increased domestic production, piped gas from Central Asian producers and more LNG availability give CNPC more options and less incentive to agree.”

Siberian Pipelines

Gazprom plans to provide Siberian gas through two pipelines from as early as 2015, with total annual deliveries to reach 68 billion cubic meters. That’s more than 60 percent of China’s 2010 consumption, according to BP Plc’s Statistical Review of World Energy.

The gas deal would follow Russia’s 2009 agreement to supply China with crude oil for 20 years in return for $25 billion of loans to state energy companies.

In addition to energy cooperation, Chinese companies from the construction, machine-building and railway industries will join Hu in St. Petersburg after an April visit by Medvedev to China yielded “dozens” of cross-border deals, said Sergei Sanakoyev, head of the Russian-Chinese Center of Trade and Economic Cooperation in Moscow.

Boosting Growth

Russia is seeking to use the St. Petersburg forum to attract foreign investment and boost growth closer to the pace of India and China. Foreign direct investment totaled $3.9 billion in the first quarter, compared with $60 billion-$70 billion before the global economic crisis, while gross domestic product expanded 4.1 percent.

Russia, which remains hopeful of joining the World Trade Organization this year, wants to lure foreign capital with a $10 billion fund to co-finance international investment and has targeted innovative industries to wean the economy off its dependence on energy exports.

Medvedev and Hu will discuss joint investment and cooperation in industries including aerospace and defense, the Russian president’s chief foreign policy aide Sergei Prikhodko told reporters in Moscow last week.

Russia is also keen to lure Chinese partners to Skolkovo, the Moscow suburb Medvedev has championed as the country’s “Silicon Valley” for developing new technologies.

Hu’s speech tomorrow will probably be the highlight in St. Petersburg, underlining the growing influence of the BRIC nations at an event that features the heads of international energy companies including BP, Total SA and Statoil ASA.

“Interest toward China is on the rise and the forum is becoming a more authoritative platform,” Prikhodko said.

--With assistance from Michael Forsythe in Beijing, Paul Gordon in Hong Kong and Ilya Arkhipov in Moscow and Anna Shiryaevskaya and Caroline Connan in St. Petersburg. Editors: Andrew Langley, Balazs Penz.

To contact the reporters on this story: Lyubov Pronina in Moscow at lpronina@bloomberg.net; Henry Meyer in Moscow at hmeyer4@bloomberg.net;

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net.


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