Russia's Gazprom Signs Agreement to Extend Gas Deliveries to China

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Researched by Industrial Info Resources (Sugar Land, Texas)--Russia's state-controlled natural gas exporter, OAO Gazprom (PINK:OGAZPY) (Moscow, Russia), announced that it has signed a legally binding framework agreement with China's state-owned energy company, CNPC (Beijing, China), to deliver gas to China from its production base in western Siberia.

According to the agreement, Gazprom will ship 30 billion cubic meters (bcm) of natural gas per year to China. Russian President Vladimir Putin signed the agreement this weekend, while attending the Asia-Pacific Economic Cooperation (APEC) summit in Beijing.

Russia is trying to accelerate energy exports to Asia, especially China, to balance the effects of economic sanctions by Western countries following recent troubles in Ukraine. In late October, Ukraine accepted Russia's demands for prepayment for natural gas supplies in November. As part of the deal, Ukraine has committed to pay off $3.1 billion of its gas debt to Russia by the end of the year, starting with $1.45 billion by the end of November, and another $1.65 billion by the end of the year.

Second Agreement with China in Last Six Months
The agreement came after Gazprom and CNPC signed a deal in May for Gazprom to send up to 38 bcm/year of gas from East Siberia to China through the future Power of Siberia pipeline, beginning as early as 2018.

For additional information on the Russia-China gas deal, see May 22, 2014, article - Russia's Gazprom Signs $400 Billion Gas Agreement with China's CNPC.

Gazprom President Alexei Miller announced that the western route has become a priority project of gas cooperation between Russia and China.

Pavel Kushnir, an analyst at Deutsche Bank in Moscow, said: "Gazprom's focus in the past on the western route postponed the signing of an agreement with China on the eastern route. That had happened, despite the fact that the gas deliveries from east Siberia are more profitable than gas deliveries from west Siberia, and that China needs gas in its northeastern parts rather than in the west, where it is well supplied from Central Asia."

The 30-year supply agreement is worth an estimated $400 billion. With this deal, China will become Russia's largest natural gas buyer, with volumes totaling 68 bcm/year.

"Gazprom would have to provide a discount of up to 70% on the European exports net-back at wellhead in west Siberia to make the Russian gas attractive versus the Turkmenistan gas," Kushnir said.

CNPC did not give specific details regarding when gas deliveries through the western route would begin. However, Gazprom said previously that supplies could start even before the eastern route was established.

Earlier this year, China raised its target for natural-gas consumption to as much as 420 bcm per year by 2020, up from 170 bcm in 2013. According to the International Energy Agency, China's appetite for gas will double by 2018, as the world's biggest energy user seeks to replace coal-burning power plants.

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