CNPC called ‘winner’ in Gazprom gas deal

The $400 billion natural gas deal Gazprom signed with China National Petroleum Corp. last month strongly favors the Chinese company and its country, writes an analyst with Chatham House, the Royal Institute of International Affairs, London (OGJ Online, May 21, 2014).

“At best, the contract with China will barely allow Gazprom to cover costs,” writes Ilya Zaslavskiy, Robert Bosch fellow in the think tank’s Russia and Eurasia Program. “At worst, it could expose its monopoly and result in huge losses.”

Gazprom is to supply 38 billion cu m/year of gas under the 30-year deal at an average price, confirmed by Russian Energy Minister Alexander Novak, of $350/thousand cu m (Mcm), Zaslavskiy reports. Links to the price of oil remain vague.

Undisclosed take-or-pay requirements and future price negotiations probably are less favorable to Gazprom than those features of the Russian company’s contracts with European customers, the analyst says. CNPC had the stronger bargaining position because of its alternative gas supplies from Central Asia, Myanmar, LNG, and domestic resources of gas and coal.

Zaslavskiy estimates Gazprom’s direct expenses on production, processing, and transit might exceed $300/Mcm.

That total includes $100/Mcm for development of Chayanda and Kovytka fields in eastern Siberia. Costs related to transportation and processing—including construction of the Power of Siberia pipeline, expansion of the Sakhalin-Khabarovsk-Vladivostok pipeline, and construction of a processing plant and petrochemical facility in Belogorsk—will be at least $150-200/Mcm, the analyst says.

Russian President Vladimir Putin suspended the mineral extraction tax in a move that will lower government receipts by $30 billion over the life of the contract.

“The real winner,” writes Zaslavskiy, is China.

“By forcing on Gazprom the same price that it pays for Central Asian and Burmese gas, China has confirmed its status as a regional gas price-setter,” he says, noting those suppliers receive an average $355/Mcm.

“The deal has also put China in a much stronger bargaining position against LNG suppliers in the United States, Canada, Australia, and the Middle East and opened doors for a relatively smooth transition to a more liberalized internal energy market.”   

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