Gazprom mulls new gas supply deal with China, eyes Indian market: CEO

Increasing natural gas exports to Asia and the potential effects of the Ukrainian crisis on exports to Europe are topping the international agenda of Russian gas giant Gazprom, CEO Alexei Miller suggested Friday at a news conference following the company's annual shareholders' meeting.

With the $400 billion, 38 billion cubic meter/year contract to supply China with East Siberian gas in hand, Gazprom has begun talks on supplies via the so-called western route, Miller said.

"The talks on the western route have begun immediately after the signing of the contract on the gas deliveries via the eastern route," he said, adding that the deal, which envisions supplies of up to 30 billion cubic meters/year of gas to China, may be signed "in the near future."

The western route talks began during Russian President Vladimir Putin visit to China in late May when the eastern route deal was reached, he said.

Putin last month said pipeline gas supplies to China from Western Siberia may begin even sooner than eastern route deliveries and could commence in the 2018-2020 period, should China express an interest.

Gazprom also is looking to expand cooperation Japan and by year's end expects to sign binding agreements with leading Japanese energy companies on supplies from the planned Vladivostok LNG export project, Miller said, providing no further details.

He also said the company expects to choose partners for the Vladivostok LNG project by the end of the year and said Gazprom is talking about the project with potential Chinese partners.

ROUTE TO INDIA

In addition, Miller discussed media reports about potential extension of the future Cino-Russian gas route to the border of India and China, calling the idea potentially interesting for Gazprom, but technically challenging because the pipeline would have to run through high-mountain areas.

Earlier this week, Indian newspaper the Financial Express reported India is set to begin talks with Russia over extending the East Siberia-to-China pipeline to the Indian border.

According to the newspaper, the possibility of such an extension will be discussed by Chinese, Indian and Russian officials during a July summit of Brazil, Russia, India and China, the so-called BRIC countries, and during a scheduled visit to India by Putin later this year.

Of the newspaper report, Miller said that "[s]o far, it is just an idea, a brave and beautiful idea."

"Were such an idea discussed at a practical level, it could be of interest for us," Miller said, adding that the possibilities of pipeline gas supplies to the rapidly developing Indian market are significantly larger than those for LNG.

Gazprom has already inked a deal to supply 2.5 million mt/year of LNG to India and talks are under way to increase that amount by as much as 1 million mt/year. The first deliveries are expected in 2019.

While Gazprom has shown an increased interest in Asian Pacific markets, the future of its European exports has emerged as a concern because of weaker demand, potential energy sanctions and Russian disagreements with Ukraine, which is a key transit country for Russian gas supplies to Europe.

UKRAINE RISKS

Commenting on the standoff between Gazprom and Ukraine over Kiev's multi-billion-dollar gas debt and gas prices, Miller warned that the dispute could have a direct impact on Gazprom's supplies to its European customers, who might consider re-exporting Russian gas to Ukraine.

"Supplies to companies that would deliver [gas] via reverse routes may be limited," he said.

Gazprom considers any reverse supplies "a con scheme," under which Russian gas does not actually even cross Ukraine's border with European countries, Miller said.

Ukraine is able to import 7-10 billion cu m/year of gas via Poland and Hungary, according to national energy company Naftogaz. Ukraine also hopes to arrange imports of up to 30 billion cu m/year from Europe through Slovakia, although Slovakia has so far not agreed to the transit.

Miller also did not rule out that Ukraine may siphon off gas volumes destined for European consumers in autumn when its domestic demand rises.

"At present, the problem is not obvious as gas consumption in Ukraine remains at a low level in the summer, but in the autumn we may hear about Ukraine taking [transit] gas [destined for Europe]," Miller said.

So far, Russian gas shipments through Ukraine are stable, despite a halt in deliveries to Ukraine. Gazprom stopped deliveries to its western neighbor after the parties failed to agree on the gas price and Ukraine failed to pay for already delivered gas to this country.

Ukraine's owes Gazprom $4.5 billion for 11.5 billion cu m of gas, Miller said, adding that these are "astronomic figures."

Naftogaz is looking to renegotiate its contract with Gazprom to lower the gas price, but recent media reports quoted Naftogaz CEO Andriy Kobolev as saying that Ukraine wants to reconsider the transit contract as well.

Naftogaz is looking to pay $268/thousand cu m for Russian gas, the price set for the first quarter of this year, while Gazprom insists that Ukraine must first repay its debt, before a cut in gas prices can be discussed. Gazprom has indicated it's ready to reduce the price to $386/thousand cu m from $486/thousand cu m now.

But Miller said Gazprom is unaware of Naftogaz's desire to renegotiate the transit deal. "Naftogaz has not raised this issue to Gazprom, neither in talks nor in written form," Miller said at the briefing. He added, however, that any such plan would be "very bad news."

Ukraine last year accounted for roughly a half of Russia's 162.7 billion cu m of exports to Europe.

Miller also said "Gazprom is not in any way interested in participating in the consortium to run Ukraine's gas transportation system. The moment has been lost," he said.

Ukraine has been considering a joint venture with EU and US companies to run the gas network, but has no current plans to invite Russia to participate.

But several years ago establishing a consortium of Russia, Ukraine and the EU to run the gas network was high on the agenda.