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China and Russia Dispute Energy Prices

sinorussian070908.gifIt is a frequent threat from Gazprom executives that if Europe doesn’t start unilaterally opening up to allow the Russian state to purchase distribution and direct sales assets, that they will decide all of a sudden to send the gas to the East to slake China’s growing industrial thirst for energy. We saw this one as another bluff. An excerpt from an Energy Tribune article backs this position up:

There was something unusual about Alexander Medvedev’s visit to Beijing in May: the newly elected Russian president didn’t take his energy minister along. This might easily be explained by claiming that Medvedev just wanted to chat with his Chinese counterparts, but that doesn’t make much sense. Russia and China have been trying to conclude a number of oil and gas pipeline deals, some of which have been pending for years.

For instance, the two countries still struggle over a pricing impasse for construction of the East Siberia-Pacific Ocean (EPOC) oil pipeline, and two new natural gas pipelines that are expected to pump natural gas from eastern and western Siberia to China. The original plan called for Rosneft to complete EPOC’s eastbound section, stretching from Taishet in east Siberia to Skovorodino, before year’s end, but now the company is likely to delay the project by another year, due partly to continuing price negotiations. Rosneft believes that, based on the original price formula agreed on in 2006, it would lose about $40 per ton of crude sold to China. Thus, it’s not surprising that Rosneft wants Medvedev and the Kremlin to resume crude price negotiations with China.For China, an increase in prices would be more bad news. Its government controls oil product prices as part of its efforts to stem inflation. And that makes it difficult for CNPC, Rosneft’s Chinese counterpart, to accept a sharp price rise.For his part, Medvedev claims that China and Russia “have basic agreements” on the pipeline projects and that the talks’ final stages are underway. But many uncertainties remain. Gazprom prefers to use the same gas export price formula for China as for its European customers, which is far higher than what CNPC can accept.Indeed, pricing remains the key issue. Rosneft and Gazprom want contracts that closely follow market prices. CNPC insists that the average Chinese resident’s purchasing power must be factored into the price. Further, it wants the price of Russian gas to be aligned with coal prices in northeastern China, a concept that is not acceptable to the Russians.In addition to price, there are other concerns about natural gas supplies for China. Russia’s natural gas resources can’t supply both Europe and China. In fact, Siberia’s natural gas output is likely insufficient to supply Russia’s European customers. And even though the Sakhalin-1 project has 485 billion cubic meters (17 Tcf) of proven natural gas reserves, not much of that will go to China because Japan has the lion’s share in the project.