May 07, 2013 07:07 PM

How China and Russia Came Together on Natural Gas Deal


(Beijing) – President Xi Jinping's state visit to Russia in late March brought advances that could end nine years of tough talks between China and its northern neighbor over natural gas transmission.

China National Petroleum Corp. (CNPC), the country's largest producer of gas, signed a memorandum of understanding with Russian energy giant Gazprom in late March. The two agreed that from 2018 to 2048 Gazprom would send 38 billion cubic meters of natural gas annually through a pipeline into China.

The pipeline will run from the Russian regions of East Siberia and Far East to eastern China.

Both firms agreed that they would sign a framework agreement by the end of June. They said they expected a final deal to be reached by year's end.

The negotiations over natural gas transmission "have made big progress," CNPC Chairman Zhou Jiping said of the deal.

The two companies will also conduct research into building a pipeline that runs from the West Siberia region to China's far western Xinjiang region. The pipeline would connect to the West-East Gas Pipeline and transmit 30 billion cubic meters of gas per year.
If all these developments come to pass, China would replace Germany as Russia's largest destination for natural gas export.

Over the years, the biggest obstacle for the countries to reach an agreement has been price. "CNPC wanted the price to be cheaper than the gas it imported from Turkmenistan, while Russia wanted China to pay the same price European countries did," a source close to the company said.

The average cost, insurance and freight (CIF) price that China paid for gas imported from Turkmenistan in 2012 was 2.5 yuan per cubic meter, data from the CNPC Economics and Technology Research Institute shows. However, Germany was paying Russia about 3 yuan last year. Meanwhile, the Chinese government told CNPC to sell gas from the West-East Gas Pipeline that was intended for industrial use for 1.19 yuan per cubic meter.  

"CNPC has been losing money even on the gas imported from Turkmenistan," the source close to the company said. "In 2012, CNPC's imported gas segment posted a loss of 42 billion yuan and it expects to record a deficit for this segment of 60 billion yuan this year. CNPC could not pay the price that Russia asked for."

Previously, Russia dominated the talks with China, industry analysts said. However, as the world's natural gas situation has changed over the years, China gradually gained leverage.

European countries have been Russia's main natural gas export destinations for years, but this has changed. Europe's import channels have become more diversified as it can import gas from the regions such as the Middle East and West Africa. Also, there has been friction between Russia and countries such as France, Germany, Italy and Austria over gas prices.

This has spurred Europe to be less dependent on Russian gas, which changed the Sino-Russian talks. "This time the negotiations ran smoothly," the source close to CNPC said.

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