Gazprom targets May for China gas deal, angles for pre-payments

by Reuters
Wednesday, 22 January 2014 14:01 GMT

* Price of $10-$11 per mmBtu discussed, China hopes for cuts - sources

* Gazprom, CNPC official met in Beijing on Wednesday

* Gazprom has failed to sign the deal after years of talks

* CNPC officials in graft probe, the investigation hinders deals (Updates with Gazprom statement)

By Vladimir Soldatkin, Ron Bousso and Oleg Vukmanovic

MOSCOW/LONDON, Jan 22 (Reuters) - Gazprom on Wednesday proposed signing a major China gas export deal in May, as industry sources indicated that the Russian gas giant may offer a lower price in return for billions of dollars in upfront payments.

Talks on selling Russian gas to China have dragged on for years with the two sides unable to agree on pricing. The state-owned Russian gas firm is wary of any deal that would undercut its existing European supply contracts.

Gazprom hopes to sign the long-awaited deal when President Vladimir Putin visits China in May. CEO Alexei Miller floated the idea at a meeting in Beijing with Zhou Jiping, the chairman of China National Petroleum Corp (CNPC).

"Both sides are interested in successfully concluding the talks and focused on signing the contract as soon as possible," Gazprom said in a statement, adding that the contract should enter force this year.

A source close to the Russian company added that price terms had still not been agreed.

Kremlin-controlled oil company Rosneft has already established a precedent for huge advances on its exports to China, receiving at least $12 billion lump sum late last year as part of a deal to ramp up supplies.

"China is standing very firm on their demand for low gas prices. But they seem to be much happier to explore the idea of pre-payment. They tested this scheme many times with Rosneft and it worked quite effectively," a senior banking source said.

Industry sources said upheaval at CNPC, which is at the centre of one of the biggest corruption probes in the Chinese state sector in years, has put on hold all major deals involving the firm.

But Gazprom is hoping to clinch a deal to pump 38 billion cubic metres per year by pipeline to China from 2018. That would be a quarter of its current sales to its main European export market, which generates more than half of its total revenues.

The strategic agreement would be a milestone in Putin's drive to diversify Russia's energy exports away from the European market, where Gazprom faces a probe into alleged monopoly practices, towards energy-hungry Asia.


Gazprom's average gas sale price to Europe last year was $10.60 per million British thermal units - the pricing standard used in the global gas trade. That works out at $380 per 1,000 cubic metres according to the pricing convention used in Russia.

Industry sources say that Gazprom is hoping for $10-$11 per mmBtu from China. China is believed to pay $9 per mmBtu to Turkmenistan, the former Soviet state in Central Asia that beat Gazprom to the Chinese market.

"Gazprom is ready to price the volumes against which China would make prepayments at $350 ($9.80 per mmBtu). I can't tell you at the moment what the size of the upfront fee might be," said one source close to the talks.

Gazprom may shed more light on the talks on Thursday, when it publishes its third-quarter financial results followed by a conference call.

"I'm sure CNPC would welcome any new announcements from other potential suppliers in the final stretch which could give them the leverage they need to push under the $10 barrier," said a diplomatic source.

Further gas talks will be held when Chinese President Xi Jinping visits Russia for the opening of the Winter Olympics in the Black Sea resort of Sochi on Feb. 7.

An official at PetroChina Co Ltd , for which CNPC is a parent company, said that CNPC officials would be part of the Chinese delegation.

The natural gas import issue would be further discussed there, said the official, who did not want to disclose his name due to sensitivity of the talks. He was not aware that the issue of prepayments has been discussed.

Negotiators had hoped to wrap up a deal by the end of last year but the deadline passed without any breakthrough.

Russia, the world's biggest gas producer, faces rising competition from liquefied natural gas exporters and aims to bolster its own production with steps that included ending Gazprom's monopoly on gas exports this year.

The threat posed by other suppliers has also spurred Russia in its bid to lock in a supply deal with China and prompted it to ease its price demands. China faces pressures to avert a projected gas shortage as rapid demand growth outstrips supply. (Additional reporting by Denis Pinchuk in Moscow, Aizhu Chen in Bejing, Ron Bousso, Henning Gloystein and Dmitry Zhdannikov in London; Writing by Vladimir Soldatkin; Editing by Douglas Busvine, Peter Graff and Giles Elgood)

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