The story appears on

Page A11

May 27, 2014

GET this page in PDF

Free for subscribers

View shopping cart

Related News

Home » Business » Biz Special

Gas deal strategic to China’s energy supply

CHINA’S landmark US$400 billion deal to buy Russian natural gas holds great significance for the nation’s future energy supply but may deliver limited financial benefit.

Russian state gas firm Gazprom signed the 30-year contract with China National Petroleum Corp in Shanghai last week during a visit by Russian President Vladimir Putin. It was the biggest gas deal ever signed in either country.

Neither side has disclosed the price details at the center of tough negotiations that lasted more than a decade, but top Gazprom officials and industry sources said CNPC would pay more than US$350 per 1,000 cubic meters, or 2.20 yuan per cubic meter.

The indicative deal price is at least 40 percent more than the current spot price for domestic gas, which ranges from 1 yuan to 1.60 yuan per cubic meter, according to Fitch Ratings. It also compares with Gazprom’s 2013 average price of about US$380 in Western Europe, its biggest market.

That means CNPC, or its listed unit PetroChina Co, won’t be able to make a positive return on the deal if China fails to raise gas prices to sufficiently higher levels in the domestic market, where prices are regulated.

The cost of pipeline construction will also make any investment return on the deal less attractive.

“For China and CNPC, the strategic significance of the deal exceeds the economic benefits it will bring,” CICC analyst Guan Bin said.

Still, he said, while the price doesn't look particularly cheap, the deal will create some downward pressure on gas prices in the future, given its massive size.

Time to improve returns

Guan said CNPC could realize better returns if the government reduces or removes a 13 percent value-added tax on gas imports. CNPC will also benefit if it could win government approval to sell the Russian gas directly to end users rather than via city gas operators — which have emerged as the main beneficiary of the Gazprom deal in China because of increased supply.

“CNPC has time to work out options to improve its return on the project because there are four to five years to go before delivery starts,” Guan said.

Under the contract, Gazprom will start supplying 38 billion cubic meters of gas annually to China in 2018, with a new pipeline linking its eastern Siberian fields and northeastern China. The annual volume is expected to account for 10 percent of China's gas demand by 2020.

Last year, China used around 168 billion cubic meters, of which 30 percent was imported. Demand is rising fast as the government switches to gas and other cleaner energy sources to address its growing appetite for energy while tackling pollution associated with coal burning.

“We anticipate overall gas demand from China over the next two decades will grow more rapidly than that witnessed in Europe from the mid-1980s,” said Gavin Thompson, head of Asia gas research for Wood Mackenzie.

He said the areas of northern and eastern China to be supplied by Gazprom are almost identical in population with Western Europe. Gazprom’s exports to Western Europe first reached 38 billion cubic meters in the mid-1980s and have since increased to over 150 billion cubic meters to the whole of Europe.

The new China-Russian deal helps diversify the sources of China’s gas imports, now mainly piped from Turkmenistan and shipped in the form liquefied natural gas from countries like Australia, Malaysia and Qatar. It also follows an agreement by CNPC last year to take an equity stake in a Russia LNG project controlled by OAO Novatek and buy gas from it.

Cut in costly LNG imports

The Gazprom deal will reduce China’s reliance on expensive LNG imports, from 14 percent of the country’s total supply today to 6-8 percent by 2020, according to CICC. That will benefit PetroChina, the nation's biggest gas importer. Increases in LNG import prices are expected to slow in the next few years.

CNPC’s indicative price in the Gazprom deal is about 60 percent cheaper than China’s shipped LNG imports and on par with its piped gas imports from Central Asia, according to Fitch.

The new deal is also expected to prompt China to continue to liberalize domestic gas pricing, as it demonstrates the government’s determination to use cleaner energy. In this sense, the Gazprom deal is positive for CNPC, which holds over 60 percent of China’s gas reserves and whose realized gas prices from its domestic production were about US$180 per 1,000 cubic meters last year.

CNPC did report a profit in its mid-stream gas operations in the final quarter of 2013, thanks to a gas price increase. That reversed from losses during a period of high import costs.

Still, Swiss bank UBS said in a research note that the Gazprom deal’s impact on pricing will be “immaterial” because the contract will account for only 8 percent of China’s supply by 2023.

Analysts also said Gazprom’s total gas supply could reach an even higher volume if a second Russian gas pipeline is built linking western Siberia and northwestern China in the future, as energy relations between the two countries expand.

Some analysts have portrayed the Gazprom deal as Russia turning away from Europe because of the ongoing crisis in the Ukraine. That view, however, disregards Russia's ability to increase gas supplies to China without affecting its ability to service existing customers in Europe.

“The company's challenge historically has been to find ways to monetize its 23 trillion cubic meters of reserves at acceptable prices — and the best scenario for the company is an increase in production,” Fitch said.

China also agreed on a US$25 billion prepayment under the supply deal, Alexander Medvedev, chief executive of Gazprom Export, said last Friday, two days after the signing. CICC’s Guan said the prepayment, a way of low-cost financing for Gazprom, should come from a Chinese government lender rather than from CNPC or PetroChina themselves.




 

Copyright © 1999- Shanghai Daily. All rights reserved.Preferably viewed with Internet Explorer 8 or newer browsers.

沪公网安备 31010602000204号

Email this to your friend