Russia Gazprom: Sino-Russia Gas Talks Halted by China's Gas Pricing Mechanism

Talks between China and Russia on a huge gas export deal have failed to make progress because it is the Chinese government, not the market that set pricing for China's natural gas sales, a top executive with Russia's Gazprom told Caijing.

Curbing inflation, the supposed purpose to control its gas prices, has deterred the development of gas trade between China and Russia, Sergei Komlev, Head of Contract Structuring and Price Formation Directorate in Gazprom Export, the trade arm of the Russia's major gas company Gazprom, wrote in response to Caijing's interview.

According to Komlev, the so-called netback pricing introduced by Gazprom, which refers to the process of equalizing the gas price in Russia to the gas price in Europe after adjusting for export taxes, transportation costs and transit tarrifs, could help the state-owned gas giant to enjoy the same gains both in domestic and export prices.

Gazprom is the largest extractor of natural gas and the largest Russian company. Europe imports one fourth of its gas from the company.

Marathon talks

Beijing and Moscow have haggled for nearly six years since Russia agreed to build two pipelines and export gas to China in a memorandum of understanding signed in 2006.

According to the MOU, Russia would provide 68 billion cubic meters of natural gas annually to China through the two pipelines from 2011, a process that was halted because the two sides were unable to agree on a price.

On Thursday, Russia's Ria Novosti News Agency reported that the state-backed PetroChina, the country's second-biggest refiner, had proposed a new round of talk on gas exports with Gazprom.

The proposal was still pending a reply from the Russia side, the agency said, quoting a source from PetroChina.

The source added that Beijing hopes to solve the problems stand in the way of the negotiation before Beijing holds the Shanghai Cooperation Organization summit in June, and that differences in prices will remain as the biggest obstacle.

Unconventional gas development

China's gas demand will reach about 400 billion cubic meters by the year of 2020, according to Xu Fu, a senior engineer with PetroChina. Assume China's domestic production grows at 10 billion cubic meters annually, China will still see a gas gap of 200 billion, Xu said. “Increasing gas imports is an evitable long-term trend.”

That partly gives a boost to China's plan to tap unconventional gas sources. Komlev, when talking about the production of unconventional sources, said Russia has so far no intention to develop their shale gas reserves because of higher costs of extraction than that of conventional resources, and the fact that Russia has the world's largest conventional gas reserves.

For China, according to Komlev, extracting shale gas and other unconventional gas resources could help it adjust domestic prices based on the market, and thus bringing the two sides to an agreement in prices.

China plans to expand production of shale gas and coalseam gas to 30 billion and 6.5 billion cubic meters by 2015, according to a government planning for the “12th five-year”(2011-2015).

It is a hard target, said Xu Fu, adding that China had failed to accomplish its target for coalseam gas production for the previous five-year plan.

Pricing scheme reforms

Chinese oil and gas refiners have been reportedly grumbling over lower domestic prices under the current pricing mechanism than global prices, which have caused loses in those companies' refining sector.

Early this month, the official Shanghai Securities News carried a report that China will expand a pilot reform of the scheme from as soon as this month, which was applied first in south Chinas' Guangdong and Guangxi last year.

China's gas price reform is, eventually, “to liberalise well-head prices and let the market decide the price, and the government only manages the prices of pipeline transmissions,” the National Development and Reform Commission said in a statement on its website