China will be paying more for gas supplies from Russia compared to purchases from elsewhere in Central Asia as the nation seeks to feed its huge energy appetite.
Experts say the energy imports once again underscore the need for gas price reform in China to ensure a proper balance between the interests of domestic suppliers and consumers.
China and Russia finally came to an agreement on Wednesday on a natural gas supply deal after 10 years of negotiation. Some experts see the gas price in the range of US$380 to US$388 per thousand cubic meters, far higher than the US$200-level of gas imported from Central Asian nations such as Turkmenistan and Kazakhstan.
As the deal has been signed, the next step forward should be gas price reform, as the domestic gas price is still very low at present and makes it hard for local suppliers to be profitable. Reform will ultimately mean that end-users will have to pay higher prices.
“The price [of Russian gas] should be somewhere between US$380 and US$388 per 1,000 cubic meters, going by the latest update from the two governments,” Sun Yongxiang, a researcher at the Institute of Eurasia Development at the Research Center of the State Council, told Beijing News.
A separate report by the 21st Century Business Herald cited an unidentified source from China National Petroleum Corp. (CNPC) headquarters as saying that “the gas price in the future is hard to predict although the current price is somewhat similar to what we have expected, at US$350 per 1,000 cubic meters.”
Meanwhile, Lin Boqiang, a professor at the Center of China Energy Economics Research at Xiamen University said the export price of the gas to China might be slightly lower compared to what Russia charges for supplies to Europe.
This could be the reason why the price in the Russia-China deal has not been disclosed, he told Headline News. The discount for China might be due to a desire of Moscow for stronger relationship with Beijing, or the overly-long period of negotiation, he said.
In the deal inked Wednesday in Shanghai between the leaders of the two nations, Russia will supply natural gas to China under a 30-year multi-billion dollar contract. Gas will start moving to China from 2018; the volume will increase annually until it reaches 38 billion cubic meters a year.
“The agreement is 98 percent complete, what is left is just the price,” media reports had earlier cited Andrey Denisov, Russian Ambassador to China, as saying.
Russian President Vladimir Putin arrived in China on Tuesday, in a visit aimed at bolstering cooperation with Beijing as his relations with the West has soured following the Ukraine crisis.
The contract is worth US$400 billion and is the largest such deal, media reports quoted Gazprom chief executive Alexei Miller as saying. “We have never had such a big deal… before,” he said.
State-controlled Gazprom holds the world’s largest natural gas reserves.
The target market for gas supply is mainly the northeast China region, Beijing and Tianjin, as well as the Yangtze River Delta. It will also ensure balanced supply to the whole country through the pipeline network, Beijing News said.
Natural gas is important to China’s push in transforming its energy structure to deal with the pollution problem. According to statistics compiled by CNPC, the nation’s consumption of natural gas in 2013 was at 167 billion cubic meters, up 13.9 percent over the previous year. Consumption is expected to grow 10 percent annually in the coming years.
“Although the deal has been sealed, domestic gas price must be reformed. Authorities should let the market decide on it as soon as possible, else our natural gas business will continue to suffer loss,” the Business Herald cited its CNPC source as saying.
The reason for losses in natural gas business is that the reliance on imported gas is increasing while the domestic one is still under a low gas price policy. CNPC lost 20 billion yuan (US$3.21 billion) in 2011 when it started to import natural gas from central Asia, and the loss grew to 41.9 billion yuan in the next year. Last year, the company still suffered a loss amid a government subsidy regime.
“The country has imported 53 billion cubic meters of natural gas last year around the world and we are going to see 60 billion cubic meters of Russian import per year; how can it work if the price is not driven by the market?,” the CNPC source told Business Herald.
According to the National Development and Reform Commission, the pricing of industrial natural gas will follow a dual-track rule that the gas stock will be charged at the previous price while the newly imported one will follow a different price before 2015. The rules will be combined by 2015.
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