Moscow and Beijing face tough gas price talks
March 23, 2006Financial Times
By Richard McGregor in Beijing and Neil Buckley in Moscow
Beijing and Moscow face difficult negotiations over prices to realise this week’s announcement of the construction of two pipelines to carry natural gas from Russia to China in five years.
The deal, signed on Tuesday, formed the centrepiece of the state visit by Vladimir Putin, Russia’s president, to Beijing.
Sergei Lavrov, Russia’s foreign minister, yesterday said Russia would sell the gas to China at the “market price”, calculated according to the same formula linked to oil and diesel prices as for sales to Europe.
But China has balked at signing long-term import gas contracts for the past three years as prices have risen alongside oil, outstripping domestic rates which are kept artificially low. China’s failure to import more gas has led power producers to turn to coal.
“Coal is going to be the predominantly competing fuel, and this raises the issue of how much gas is going to get used in China,” said John Harris, in the Beijing office of Cera, the energy consultancy.
But pipeline gas should be cheaper than liquefied natural gas, where price rises have been highest, leaving industry executives confident a deal can be struck. “The pipeline gas will be competitive,” said Victor Vekselberg, director of gas at TNK-BP, whose field will provide the resource for one of the pipelines.
Russia-based analysts warned that Beijing and Moscow had signed ambitious energy agreements before, with limited results. The Chinese have been frustrated by the difficulty of securing energy deals with Russia and Mr Putin made no firm commitment about the construction of an oil pipeline to the Chinese city of Daqing.
Still, the agreements could foreshadow what Dmitry Trenin, a foreign policy specialist at the Carnegie Moscow Centre think-tank, believes will be a closer relationship between the two countries.
Two-way trade is rising rapidly and is complemented by closer political ties.