Putin May Sign China Gas Deal as Crisis Forces Russia’s Hand

Vladimir Putin is more likely to sign a 30-year deal to supply pipeline gas to China next month after more than a decade of false starts because the crisis in Ukraine is forcing Russia to look for markets outside Europe.

While Putin and President Xi Jinping will make the final decision in Beijing next month, Russia’s need for new customers means it’s pushing to complete a deal first mooted in 1997, a manager at gas-export monopoly OAO Gazprom (GAZP) and a government official said, asking not to be named because talks are ongoing. In China yesterday, Russia’s deputy prime minister said he “hoped” a deal would be signed in May. 

The crisis in Ukraine has increased the importance of Russia’s relationship with China, its largest trade partner outside the European Union and the only country in the United Nations Security Council not to censure its actions in Crimea. Until a China pipeline is built, Russia has few export markets for gas outside Europe, leaving it vulnerable to sanctions and competition from U.S. exports of shale gas. 

Gazprom Chief Executive Officer Alexey Miller met China National Petroleum Corp. Chairman Zhou Jiping in Beijing yesterday to discuss the terms of a deal. CNPC expects to sign a contract with Gazprom “as soon as possible” and talks on prices for supply from Siberia to China are in “active progress,” the Chinese company said in a newsletter posted on its website today.

The gas-supply deal allowing the construction of the Power of Siberia pipeline across eastern Russia into China has foundered on price. To finance the $22 billion pipeline, Russia sought to match the rates it got for its gas in Europe, a level China hasn’t been willing to pay. 

Gazprom needs the equivalent of about $13.50 per million British thermal units to profitably finance the pipeline and the development of Siberian gas fields to feed it, a total outlay of $90 billion, Maxim Moshkov, an energy analyst at UBS in Moscow, said by e-mail. CNPC won’t want to pay more than $11 at the border, a price Gazprom may be forced to meet, cutting into future earnings, Moshkov said.

China increased natural-gas consumption more than 10 percent to 186 million cubic meters last year as imports gained 25 percent, according to news agency Xinhua. Gas consumption is likely to be boosted further by a drive to close coal-fired power stations to curb pollution. China’s premier Li Keqiang said last month the country will “declare war” on smog.

(bloomberg.com Edited by Topco)