Chinese mistake of Transneft

Transneft and the China National Petroleum Corporation persistently keep negotiating a formula of pricing Russian oil supplies. The sides cannot come to a compromise. China refuses to admit that the fixed pricing formulae are fair, which, actually, somewhat reminds of Ukraine’s tactics. However, the Ukrainian contract is posted on the Internet and we can examine it, while the Chinese accord is top secret.

The situation with Beijing evidently shows that new markets should not become an end in itself for Russia. There is no such task as to obligatory find a new market to sell our gas there. The same concerns North Korea. There is no task to develop the gas supplies infrastructure in North Korea, if we realize that it is unable to pay for natural gas.

The main question is how much we will get for deliveries of our energy resources and what the price will be. In this regard, the idea of receiving equal profits from supplies to China and to Europe was quite logical. But, unfortunately, Russia followed a different direction. Half a year after the contract on Russian gas supplies to China came into force, we started experiencing some difficulties. Why did it happen? Well, because our tactics is to occupy a springboard and then to look around. Unfortunately, this does not work with China. We need to follow clear-cut principles in our energy strategy concerning relations with this country. One of these principles is to understand that we should get the same dividends from supplies to China as from deliveries to Europe. This concerns both the gas and oil business.

We should not be misled by well-known Chinese propaganda claiming that they have enough of oil and gas and they do not really need us. In reality, Beijing pays over $450 per 1,000 cu m of LNG on the spot market, which is very expensive. Buying Turkmen natural gas at $120 to $140 per 1,000 cu m can be attributed to political weakness of Turkmenistan. We can certainly follow Ashkhabad’s policy: “Take our gas at whatever price – we just want to come to your market”. But this is not a sound approach. We have to understand that natural gas is in demand; we have to clearly see the general situation on the world market of energy sources. And we should not yield to provocative statements about the necessity to act fast or we will lose the Chinese market. We should not begin supplies and then agree on prices. We have already made such a mistake and now we should be very serious and cautious.

Another important question is that Beijing is obviously interested in development of Eastern Siberian deposits. The logic is clear. I think the issue of gas and oil deliveries to China should be linked to the pace of development of Eastern Siberia. Currently we pump oil not from Eastern Siberia but from Western Siberia that already has its market. As far as gas is concerned, the Altai project is connected to the Nadym-Purtazovsky district of the Yamalo-Nenets Autonomous Area with its deposits, Urengoy and Yamburg, catering to European consumers. So, why do we offer Western Siberian resources to China? This is an absolutely economically unwise approach that provides China with an additional argument in price debates.

The case is likely to go to court. It is important to learn a lesson: we should not hurry, panic and sign documents, if we have not studied them thoroughly. We must examine all coefficients stipulated in contracts, because if we fail, we will later be exhausted with court hearings. Unfortunately, this is exactly what may happen.

By KONSTANTIN SIMONOV,  General Director, National Energy Security Fund