Gazprom fails to gain much by selling gas in the East
Prime Minister Vladimir Putin's visit to China may see a breakthrough in energy cooperation between the two countries. If the talks succeed, Beijing will become the biggest buyer of Russian gas. The only problem is price. The Deputy Head of Gazprom's Board of Directors Alexander Ananenkov said that this issue is still unclear. Experts believe that the risk of Russia becoming dependent on a monopoly buyer increases with every passing day.
Having arrived in China for an official visit Putin personally took part in large-scale energy talks. On Saturday Deputy Prime Minister Igor Sechin, whose government role includes the supervision of the oil and gas industry, flew to Beijing to resolve these and related issues and to draft the relevant agreements. Analysts think that China, which does not currently purchase Russian gas, could in the near future become Gazprom's biggest customer.
To reiterate: no price has been set yet. Having admitted this, Alexander Ananenkov talked at length about the ongoing negotiations with China. He said that the large resources in the East make supplies possible, that the route will remain the same, and that price is the only outstanding issue. Ananenkov said that China could be supplied with gas primarily from Yakutia, for instance from the Chayandinskoye gas field which holds about 1.3 trillion cubic metres of gas," he said. "These resources may become the foundation for supplies to Asia and the Pacific in the second stage of the Eastern Gas Programme's implementation."
He did not say what price Gazprom considered acceptable and made only one comment: "when a vendor sells something he wants to sell it at a higher price but when a buyer wants to buy a lot he wants to pay the lowest price. This buyer wants to buy a lot." "There will be no breakthrough but we will move forward," he noted. "After we reach agreement we will build a system for gas supplies within three years and will start supplies," he said.
Last summer President Dmitry Medvedev signed an enormous contract for $100 billion under which China will receive 300 million metric tons of oil in the next 20 years. A number of analysts and journalists criticised this agreement. They calculated that 300 million metric tons of oil is equivalent to 2,205 billion barrels, which means that Russia has committed itself to supplying China with oil at the average price of $45.4 per barrel whereas the world equivalent has been at 70$ per barrel for many months. It is impossible to predict how much a barrel of oil will be worth in five, 10 or 20 years.
Experts have rejected these calculations. Dmitry Alexandrov, a leading analyst with the investment company Financial Bridge said: "This simplistic calculation is obviously wrong. It does not include all components. The price of oil under the contract signed with China will be about $70-$73 per barrel, which is quite acceptable."
Alexander Razuvayev, the head of the analytical department forthe investment company Gallion Capital is also confident that Russia's oil price for China will be in line with the world price. The gas price will be a more difficult issue. "When Gazprom held talks with the Chinese on a gas pipeline linked with the Kovykta deposit in 2004 they insisted that the price of gas should equal the domestic average," Razuvayev recalled. He noted that while Russia might make some concessions, but stressed that they would be small considering the high quality of oil from Eastern Siberia.
Alexandrov mentioned three options for the gas price for China. "The first is the domestic price plus the transit costs and a 30% customs duty. This adds up to 1,700-1,800 roubles or $50-$60 per thousand cubic metres. The second is the average price of gas in China, which analysts do not know. And, finally, the third version is the export price to Europe, which is around $300 per thousand cubic metres,". He said this difference was enormous and noted with regret that Russia will only be able to consider the first two options.
Under the circumstances Russia should not allow China to become a monopoly purchaser of its gas, Alexandrov said. "The main goal is to prevent any pipeline, such as the Altai pipeline, from becoming an isolated branch for delivering gas from Russia to China alone. We need to keep the option open of supplying gas to ports and liquefying it for exports to Japan, South Korea, the United States and other countries," he said.
However, Alexandrov is not very optimistic about the pragmatic option: "If the monopoly pipeline option prevails the price of gas exports will be very low. This is the worst scenario and there is a 50% chance of it becoming reality."
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Moscow may lower its price under pressure from Beijing
Sergei Kulikov