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Gazprom eyes tradeoff between price, prepayment in China talks

Source: Reuters - Wed, 22 Jan 2014 11:16 GMT
Author: Reuters
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* Price of $10-$11 per mmBtu discussed, China hopes for cuts - sources

* Winter Olympics, Putin visit to China possible dates for the deal

* Gazprom has failed to sign the deal after years of talks

* CNPC officials in graft probe, the investigation hinders deals

By Vladimir Soldatkin, Ron Bousso and Oleg Vukmanovic

MOSCOW/LONDON, Jan 22 (Reuters) - Russian gas giant Gazprom may offer a lower price for its gas in talks with China in exchange for billions of dollars in upfront payments, industry sources said as Gazprom bosses landed in Beijing for a round of talks on Wednesday.

Talks on selling Russian gas to China have dragged on for years with the two sides unable to reach a pricing agreement. The state-owned Russian gas firm is wary of any deal that would undercut its existing European supply deals.

Kremlin-controlled oil company Rosneft has already established a precedent for huge advances on its exports to China, receiving at least $12 billion lump sum late last year as part of a deal to ramp up supplies.

"China is standing very firm on their demand for low gas prices. But they seem to be much happier to explore the idea of pre-payment. They tested this scheme many times with Rosneft and it worked quite effectively," a senior banking source said.

Industry sources said upheaval at China National Petroleum Corp (CNPC), which is at the centre of one of the biggest corruption probes in the Chinese state sector in years, has put on hold all major deals involving the firm.

But Gazprom is hoping to clinch a deal to pump 38 billion cubic metres per year by pipeline to China from 2018. That would be a quarter of its current sales to its main European export market, which generates more than half of its total revenues.

The strategic agreement would be a milestone in President Vladimir Putin's drive to diversify Russia's energy exports away from Europe, where Gazprom faces a probe into alleged monopoly practices, towards energy-hungry Asia.

"A Gazprom delegation is in China this week, but I wouldn't hold my breath. Our delegations have been visiting China for the last 10 years and left empty-handed every time," a Gazprom source said on Wednesday.

A company spokesman said Gazprom's Chief Executive Officer Alexei Miller and his deputy, Alexander Medvedev, were leading the talks in Beijing. He did not elaborate.

"While there will be some noise from Beijing, we are not sure if the agreement is feasible in the next 10 days, having heard so many false alarms in the past," analysts at Sberbank CIB in Moscow said in a research note.

PRICE IS KEY

Gazprom's average gas sale price to Europe last year was $10.60 per million British thermal units - the pricing standard used in the global gas trade. That works out at $380 per 1,000 cubic metres according to the pricing convention used in Russia.

Industry sources say that Gazprom is hoping for $10-$11 per mmBtu from China. China is believed to pay $9 per mmBtu to Turkmenistan, the former Soviet state in Central Asia that beat Gazprom to the Chinese market.

"Gazprom is ready to price the volumes against which China would make prepayments at $350 ($9.80 per mmBtu). I can't tell you at the moment what the size of the upfront fee might be," said one source close to the talks.

Gazprom may shed some light on the talks on Thursday, when it publishes its third-quarter financial results followed by a conference call.

"I'm sure CNPC would welcome any new announcements from other potential suppliers in the final stretch which could give them the leverage they need to push under the $10 barrier," said a diplomatic source.

Some sources say that Gazprom may clinch the deal during the Winter Olympics that begin on Feb. 7 in the Russian Black Sea resort of Sochi. Chinese President Xi Jinping will attend the opening ceremony.

A Russian industry source said, however, that any deal is more likely to be signed in May when Putin is due to visit China. Negotiators had hoped to wrap up a deal by the end of last year but the deadline passed without any breakthrough.

Russia, the world's biggest gas producer, faces rising competition from liquefied natural gas exporters and aims to bolster its own production with steps that included ending Gazprom's monopoly on gas exports this year.

The threat posed by other suppliers has also spurred Russia in its bid to lock in a supply deal with China and prompted it to ease its price demands. China faces pressures to avert a projected gas shortage as rapid demand growth outstrips supply. (Additional reporting by Denis Pinchuk in Moscow, Aizhu Chen in Bejing, Ron Bousso, Henning Gloystein and Dmitry Zhdannikov in London; Writing by Vladimir Soldatkin; Editing by Douglas Busvine and Peter Graff)

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