Falling oil prices slow down a new deal between Russia and China on gas supply. The market price of gas is lower than $200 for 1,000 cubic metres, but to recoup the construction of a new gas pipeline to China it should be about twice as high, and Chinese will not agree on that. According to experts, China’s position in the negotiations is better that Russia’s: China can afford to wait.
Collapsed oil price complicate negotiations between Russia and China on gas supplies, said the head of the Department of Eastern Europe and Central Asia of the Ministry of Commerce of China Ji Lin. At the same time on Tuesday “Gazprom” reported that the talks “have good momentum” and the basic conditions are determined.
It is about supplying through the so-called “Western route” (the pipeline “Power of Siberia – 2”, formerly “Altai”). According to preliminary agreements on this pipe, for 30 years China will be receiving 30 billion cubic metres of Russian gas a year. Negotiations have been conducted for a few years, and the contract for the “Eastern route” (the pipeline “Power of Siberia”) has been signed with China, but sharply dropped oil price does not allow the parties to reach a consensus on the issue of gas prices. The prices in long-term contracts of “Gazprom” are tied to oil quotations.
“Gazprom” would like China to buy gas for the price that Russia’s monopoly set for European exports. The Chinese in return offered to focus on the price of gas on the US Henry Hub. In May 2014 the parties signed a contract, for supplying 38 billion cubic meters of gas per year through the “Power of Siberia” for 30 years, and that would cost China $400 billion.
The contract price of 1,000 cubic meters was not officially disclosed by neither Russia, nor China, but based of the volume the average price of deliveries should be about $350. At the time of signing the agreement the price was close to the average level of European exports and greater than Henry Hub price of approximately $ 100 per thousand cubic meters.
Meanwhile, in November 2014, when the fall of oil prices was just slightly more than 30%, and the price per barrel fluctuated in the range of $ 74-79 (compared to $ 110 in July), the gas market experts have warned that the Gazprom’s contract with China has “lost” at least $ 100 billion.