Monday, January 21, 2013

Russia China Gas Talks Stymied

Russia and China ended 2012 no closer to a gas deal than when they began it.  The two countries continue to squabble over the construction of two natural gas pipelines designed to bring 68 billion cubic meters (bcm)    
to the Middle Kingdom.  The pipelines have been on the drawing boards for over 3 years, and Russian President Vladimir Putin believes that Eastern markets will be a focal point of Russian natural gas development.  Talks fell apart in 2011, however, when China increased its purchases from Turkmenistan.

In late April 2012, Chinese officials signaled optimism that the talks might resume.  Liu Tienan, head of China's National Energy Administration, told reporters China had  a new model for gas cooperation.  He did not specify what the new model was.  "Now all that remains is the question of prices," he said.  Tienan said Chinese Vice Premier Li Keqiang had presented Moscow with "a completely new model of development of cooperation...and received a positive assessment from the Russian side."  Tienan said both sides were interested in having private corporations from the two countries begin consultations.  Jiang Jiemin, the chairman of China National Petroleum Corporation, sounded upbeat as he explained that most of the key points to a gas deal had been agreed upon.  Putin also sounded conciliatory, "We are looking for compromises and are finding them," he said.  In an op-ed piece he wrote in June for a Chinese newspaper, Putin declared cooperation to be a Russian strategic goal:  "The energy-sector dialogue between our two countries also has a strategic dimension.  Our joint projects have a big impact in shaping the global energy market's entire configuration.  They offer China more reliable and diversified energy supplies for its domestic needs, and offer Russia the chance to open up new export routes to the fast-growing Asia-Pacific region."

According to Li Lifan of the Shanghai Academy of Social Sciences, however, when Germany renounced nuclear energy following the Japanese nuclear accident at Fukushima, Russia believed European demand for its hydrocarbons would increase.  The Russians refused to make compromises on the price question with the Chinese because Russia felt no need.

In June, Gazprom produced a new idea of its own: swapping production fields.  Russian Energy Minister Alexander Novak said, "Gazprom offered to let the Chinese participate in development of fields on Russian territory on the condition that Gazprom could participate in the development of fields on Chinese territory."  The asset swaps would be factored into the price of Russian gas shipments.  Gazprom CEO Alexander Medvedev said chances for an agreement in 2012 were very good.  "The talks are going on uneasily, but we have an understanding," he said.

In September 2012, Novak again reported progress.  He said Russia was requesting China pay in advance for natural gas from the proposed $14 billion Altai pipeline, up to 40% of the construction costs.  Matthew Hulbert commented that Russia remained unwilling to offer the price discounts the Chinese wanted.  Russia wanted $350-$400 per thousand cubic meters (tcm), while China wants to pay only $200-$250 tcm.

Putin ended the gas year making the same call for Eastern exports that he did at the beginning.  "The priorities should be supplies to the domestic market, our own economy and our enterprises, as well as diversification of markets to account for the prospective Asian segment and means of delivery," he said.

With cooperation between the two countries  uncertain, in September 2011 China signed an agreement with Kazakhstan increasing the capacity of the China Kazakh pipeline by 80% to 25 bcm.  They also signed an agreement to double pipeline capacity with Turkmenistan.  The Turkmen agreement will bring an additional 60 bcm to China by 2015, almost the same amount as the proposed Russian pipelines.  Beijing is also awaiting the completion of the trans-Burma pipeline for another 14 bcm.  Even Uzbekistan's tiny gas production is headed for China.  In May 2012, Tulagan Zhurayev, head of Uzbektransgas, said they were ready to start shipping gas immediately, as soon as some legal issues were settled.  "We haven't started shipping gas yet," he said.  "We pan this year to supply between 2 bcm and 4 bcm.  We have the gas and everything is ready."  The Uzbeks began their gas flows in August.  In short, while the talks stall Russia is losing market share to its competition.