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Friday, December 07, 2007

China, Russia Reach Gas Price Agreement

November 19, 2007 - Reuters by Emma Graham-Harrison - BEIJING -- Chinese oil company CNPC and Gazprom have agreed a gas pricing deal that should unlock a major pipeline plan, but it may come at a higher cost than Beijing wanted, the Xinhua news agency cited a Russian executive as saying Saturday. Alexander Medvedev, Gazprom's deputy chairman, said the two sides had reached consensus on the pricing mechanism for fuel piped from Russia to China after months of wrangling that had held up the start of work. However he added that negotiations "would not be influenced by China's low natural gas import prices," Xinhua said, without giving further details. Beijing holds state-set gas prices below international market levels, while Gazprom had demanded the gas export price for China should be at least comparable with supplies to Europe, after taking transportation costs into account. Russian media have reported that China was refusing to pay more than $100 per 1,000 cubic meters, similar to current Russian domestic prices and far below the European price of around $250 per 1,000 cubic meters. Gazprom, which has a monopoly on export of the fuel, was waiting for a deal to be reached to start construction. But eventually, under a deal signed last year, two pipelines either side of Mongolia could deliver up to 80 billion cubic meters of gas per year -- almost double the amount the company sells to Germany, its top customer in Europe. Moscow has agreed in principle to begin pumping gas to China through the west link in 2011 and by the east link in 2016, the country's top energy official said this summer. The first pipeline would be fed with output from western Siberian fields, Gazprom said last year. Gas for a second pipeline could come from Sakhalin and maybe the Kovykta field in East Siberia. China has hedged against the slow-going Russian deal and upped pressure on Moscow by pushing for imports from Turkmenistan and Myanmar. CNPC, parent of listed PetroChina, has agreed to import an annual 30 billion cubic meters of gas, or 60 percent of the country's total consumption last year, from Turkmenistan with the first gas flow targeted for as early as 2009. Turkmen media reported in August that construction had begun on a 7,000-kilometer pipeline to take the fuel to China by 2009, bypassing its traditional export market of Russia. In China, the gas will be fed through a pipeline linking the sparsely populated west with booming coastal regions, which can more easily afford to replace dirty-burning coal. Beijing wants to more than triple the use of the cleaner fuel, which now provides barely 3 percent of China's energy, to 200 bcm per year by 2020. Its domestic output is growing by around 20 percent per year, but cannot meet demand and import deals have been hampered by price controls as international markets soared. The government has pledged eventually to free up prices, but worries about inflation and unrest mean it has made little progress in recent years -- although this month it made the first rate increase since late 2005, adding 0.4 yuan ($0.539) per cubic meter to costs for industrial and transport users.

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