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China, Russia inch forward on energy deals

BEIJING, Oct 14 – China and Russia have shown a desire to push ahead on energy cooperation by signing gas and oil deals in Beijing this week, but major questions remain, especially on pricing, analysts said on Wednesday.

The agreements signed in Beijing during a visit by Russian Prime Minister Vladimir Putin showed that Russia wants to diversify its client base beyond Europe, while China\’s appetite for natural resources has not waned, they said.

"The Chinese government wants to ensure sufficient gas and oil supplies by signing agreements with the Russians, meeting the needs from the domestic market and fuelling economic growth," said Xia Yishan, a senior energy researcher with the China Institute of International Studies.

"However, the top concern of the companies — Chinese or Russian — is profits. It\’s difficult for them to ink unprofitable deals even though the governments have signed agreements."

Russian gas giant Gazprom reached a preliminary long-term deal with China National Petroleum Corporation (CNPC) to provide the energy-hungry Asian giant with natural gas, but most of the details have yet to be worked out.

Likewise, Russian state-owned oil giant Rosneft and CNPC advanced their efforts to collaborate on the construction of an oil refinery in the eastern Chinese port city of Tianjin and distribution.

Similar framework agreements were announced three years ago, during a visit by one of Putin\’s predecessors, Mikhail Fradkov.

"This is the logical progression of agreements reached a while ago," said Yevgeny Volk, a researcher for the US-based Heritage Foundation in Moscow.

The deals signed in Beijing are aimed "at showing that politically, the decision has been made," Volk said, but added: "Major problems remain."

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Gazprom chief Alexei Miller said the deal would see 70 billion cubic metres of natural gas a year flow into China, but CNPC president Jiang Jiemin said the final volume was still up in the air, according to Dow Jones Newswires.

Analysts agreed the devil was in the details, and that pricing was the major stumbling block on the gas accord.

"It\’s relatively costly to explore, produce and construct pipelines in alpine-like and chilly Siberia," said Xia.

"But Chinese companies stressed they cannot accept high prices because domestic gas prices are capped below market-based international prices due to government control… The final piece of the jigsaw is pricing."

Victor Shum, a Singapore-based senior principal at international energy consulting firm Purvin and Gertz, agreed, but said the announcements nevertheless represented "an incremental move forward".

"It is part of the process to have multiple incremental agreements to get any deal across," Shum said. "It will help the future development of these projects when top-level officials in both governments are giving them a push."

Gazprom is keen to see the CNPC deal go through as demand falls in Europe, which gets about a quarter of its natural gas from the Russian firm.

"By increasing its supplies to China, Gazprom would move away from its high dependence on European demand, which could potentially greatly increase its bargaining power," Italian bank UniCredit said in a research note.

While the gas deal seems win-win for both sides, Chris Weafer, chief strategist at Uralsib in Moscow, noted there was another major stumbling block beyond pricing.

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"China does not want to be dependent on sharing oil or gas infrastructure and is prepared to pay up for its future energy security. It is prepared to put up money to ensure it has an exclusive supply," Weafer said in a research note.

"Nothing is signed until Gazprom comes back with the timeline to develop a China exclusive gas deposit."

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