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China proposes new gas pact with Russia

30th April 2012

Energy sector cooperation between Russia and China is expected to get a boost as a new deal emerges between the two giants.

Russia will sell up to 68 billion cubic meters of pipeline gas per year to China under a new agreement

Chinese is keen to pursue a major gas deal with Russia despite a proliferation of alternative supplies and has made a new model for cooperation which could overcome the price deadlock, energy officials said on Saturday.

Talks between China, the world's fastest growing energy consumer, and Russia, the world's largest conventional gas producer, fell apart late in 2011 when China, frustrated by years of stalemate over price, increased its supplies from rival producer Turkmenistan.

"Now all that remains is the question of prices," said Liu Tienan, the head of China's National Energy Administration.

He said Li had presented "a completely new model of development of cooperation ... in the natural gas sphere, and received a positive assessment from the Russian side", Reuters reported.

"We are interested in the companies of our two countries beginning discussions and consultations on this issue under the new model of cooperation."

Earlier in the day, the chairman of China National Petroleum Corp. (CNPC), Jiang Jiemin, reiterated to an economic conference that most of the key points of a gas deal were agreed.

"We have signed a buy-sell agreement with Gazprom," Jiang said, singling out the deal among successful ventures including a loans-for-oil deal, under which China receives 300,000 barrels per day via a dedicated pipeline, and joint oil exploration in Siberia.

Under the terms of the gas deal, which was nearly finalised last year, Russia would sell up to 68 billion cubic meters of pipeline gas per year to China, more gas than it ships to any single European customer.

The two countries had agreed on everything but price and appeared on the brink of a final agreement a year ago when Chinese President Hu Jintao was preparing to come to Russia for an annual investor showcase in St. Petersburg.

But Russia's gas export monopoly Gazprom refused to accommodate Chinese price demands, arguing it could sell the same gas to Europe for a higher profit than the Chinese offer had implied.

Frustrated by the long-running standoff, China opted to buy extra gas from the former Soviet state of Turkmenistan, and backed up its choice with a decision to build a pipeline to accommodate more Central Asian gas.

A Gazprom source said before the Chinese visit that talks had not progressed, nor had the company reduced its asking price for pipeline gas deliveries to China.

Analysts have said China could not afford to pay Russia's asking price without raising domestic rates and eroding its competitive advantage in manufacturing.

"As always in the course of big work there are issues which require additional attention, but we have learned to do it the way close friends do," President-elect Vladimir Putin said on Friday after Gazprom chief executive Alexei Miller met Jiang.

"We are looking for compromises and are finding them," Putin said at a meeting with Li, also attended by Russia's top energy official, Deputy Prime Minister Igor Sechin and Energy Minister Sergei Shmatko.

Russia's government - increasingly wary of Gazprom's dependence on pipelines which bind it to specific customers, and particularly of increasingly competitive European markets - has meanwhile ordered Gazprom to build new coastal plants to liquefy gas for delivery by tanker.

But Russia's nascent LNG strategy may not yield substantial sales to China, because Russia's sources of gas, except the fields off the Pacific island of Sakhalin, are far from the potential sites of coastal LNG plants, far from Asian markets, or both, which could make them too costly to compete.

China is pursuing unconventional gas production at home and is confronted with a widening array of potential import options, from Central Asian pipe gas to the shale fields of the US, whose gas could be liquefied for export.