The “gas jam” to China

­China has refused to pay a $40 billion advance for Russian gas, as was requested by Gazprom. This casts doubt on the construction of a pipeline to China’s west: the funds were needed by the monopoly precisely for these goals. According to Chinese sources, the parties now plan to discuss an eastern supply route – one that is more suitable for China.

The contract for the supply of Russian gas to China along the western route will not be signed before the end of this year. This announcement was made by Interfax, citing a source close to the leadership of the China National Petroleum Corporation. In the course of the negotiations, which were conducted in Moscow between this past Wednesday and Saturday, the idea of paying Gazprom a $40 billion “advance” for gas supplies failed, the source said, explaining the reason for the delay.

Even Gazprom’s promise to issue a discount for the price of gas in return for the down payment (earlier, sources reported it could have amounted to 10 percent) left China unconvinced. This discount did not ensure a profit for China National Petroleum Corporation of 12-15 percent, which is a mandatory condition in China for investment projects, explained the source.

The fact that Gazprom is calling for an advance payment immediately after the signing of the contract became known in July. Sources quoted different amounts, from $25 billion to $40 billion. Gazprom needs the money for the construction of pipelines, which will transfer the gas to China.

According to the preliminary supply plan, they are expected to be delivered along two routes: the western (Altai gas pipeline with an annual capacity of 30 billion cubic meters of gas) and the eastern (a pipeline from Khabarovsk, with 38 billion cubic meters). Both of these pipelines are still at the design stages. Industry experts noted that $25 billion would be enough for both pipelines.

China National Petroleum Corporation representatives then stated that it is difficult to meet this demand. The company does not have $25 billion of its own funds, they said, therefore it will be forced to attract lenders, the servicing of which will be too expensive for the China National Petroleum Corporation.

After the failure of negotiations on the western route, the possibility of the construction of the eastern route remains. Gazprom has signaled that it is ready to discuss it, says a source close to China National Petroleum Corporation management.

Russia, according to the source, has asked the Chinese to name the price which they expect to pay for supplies along the eastern route, and explain in what form they are ready to participate in the project. Gazprom has not confirmed the change in the topic of the negotiations. Gazoprom’s official spokesperson, Sergey Kupriyanov, told Gazeta.ru that negotiations with China about the western route are continuing and the monopoly has not made any proposals regarding supplies along the eastern route.

“At the current stage, the western route is the only topic of discussion,” reiterated Kupriyanov.

The head of the National Energy Security Fund, Konstantin Simonov, recalled that the subject of supplying gas along the eastern route has not come up since last fall.

“Although this route seems to be more logical and better suited for discussions,” added Simonov.

For China, the eastern route is more suitable. Gas is supplied to the country’s west from Central Asia and, above all, China is developing its own production in the region.

Meanwhile, heavy industry businesses are concentrated in the country’s northeast, but coal currently accounts for about 80 percent in China’s energy balance. Moreover, one of the northeast provinces, Liaoning, could become a transit territory through which Russian gas may flow to South Korea. Here, both Russian and the Chinese negotiators have more room to maneuver, says Simonov, mainly in terms of the price. The price issue is the most difficult in the negotiations: Gazprom insists on the European price (the forecasted average price for Europe for this year is expected to be $350 per 1,000 cubic meters of gas, and $450 at the beginning of next year). China has asked to lower the price by about $100 per 1,000 cubic meters. In early summer it was reported that the parties had come closer to finding middle ground, but have yet to reach a final agreement.

“Along the western route, gas would flow from the Nadym-Purtazovsky District,” said Simonov. “However, gas from this district has been delivered to Europe for 30 years – there is demand for it, and there is the price offered by the European countries. Why deliver this gas to China for cheaper than it could be sold to Europe?”

As for the eastern route, gas is expected to travel from East Siberia, mainly from Yakutia. But this gas needs to be produced.

“Here, different pricing principles will be in effect,” said Simonov. “For example, it is simply unprofitable to supply gas to Europe from Yakutia due to the distance. And while calculating the price formula, we can already focus on Asian, and not European markets. And finally, the Chinese could be invited to participate in the Yakutia projects as minority stakeholders, which will also have an effect on the final price.”

By Alexey Topalov

RT, October 18, 2011