Price of Gazprom gas for China not to be linked to Henry Hub index
Prices for pipeline gas to be supplied to China will not be linked to the US Henry Hub Index. An agreement to that effect was signed by chairman of Gazprom Management Committee Aleksey Miller and CNPC chairman of the board Zhou Jiping on 5 September on the sidelines of the G20 summit in St Petersburg.
The document sets the main terms for supplies (with the exception of the price) and is legally binding, a statement issued by Gazprom says.
Experts are not sure whether the contract with CNPC will be profitable for Gazprom.
Ten years of talks
Gazprom and CNPC have been trying to reach an agreement on the price of gas supplies for nearly 10 years. All the other parameters were agreed several years ago.
The partners do not have any disagreements on the export volume and starting date, the take-or-pay level, the period of supply build-up, the level of guaranteed payments, and the gas delivery point, Gazprom has confirmed.
At these latest talks with China, the Russian gas giant managed to set the minimum price, a source close to Gazprom explained.
The Chinese side wanted the price to be linked to the Henry Hub Index. The current Henry Hub price of 1,000 cubic metres of gas stands at $130. If adjusted to the Henry Hub index, the price of the contract would be close to the one at which gas is sold on the domestic Russian market (about $110 per 1,000 cubic metres), VTB Capital analyst Yekaterina Rodina pointed out.
Gazprom deputy chairman of the board Aleksandr Medvedev said the company was hoping to link the gas price to the JCC index (Japanese Crude Cocktail price), with the resulting price of 1,000 cubic metres being about twice the Henry Hub price.
The JCC index is used to calculate the price of LNG produced as part of the already operating Sakhalin-2 project (in which Gazprom holds a controlling stake).
Index of one's own
No decision has yet been taken on which index the price formula will be linked to, the source close to Gazprom said. It will be neither Henry Hub nor JCC, but "an 'innovative', as Chinese colleagues put it, link of our own", the source added.
Miller said that the contract will be signed by the end of the year.
East European Gas Analysis head Mikhail Korchemkin is not convinced that Gazprom has made the right choice: "In gas price indices, the most important thing is not the level of the price but the trend. The probability of the Henry Hub price going up is higher than of any other price."
Gazprom is planning to sell 38 billion cubic metres of gas to China along the Power of Siberia pipeline (from Yakutia to Vladivostok) starting from 2017.
Investment in the project is estimated at $60 billion. The decision to build the pipeline has not been taken yet. Earlier Vedomosti sources close to Gazprom and its subsidiaries said that the launch date for the construction had been moved from November this year to the first quarter of 2014.
According to Korchemkin, for the project to break even (at a 30-per-cent duty and annual exports of 38 billion cubic metres), the gas price on the Chinese border should be over $500.
At best, Gazprom can expect to secure a price of $450 per 1,000 cubic metres, senior analyst with Ankorinvest investment company Sergey Vakhrameyev believes.
Experts polled by Vedomosti point out that the Chinese are putting together their portfolio of gas import contracts with much care and deliberation. According to Vakhrameyev, by 2020, China's gas market will amount to some 400 billion cubic metres.
Turkmenistan has recently signed a contract with China for the supply of additional 25 billion cubic metres of gas a year, bringing the overall amount of its exports to that country to 65 billion cubic metres a year.
The original contract for the supply of 40 billion cubic metres of gas was signed back in 2009. Under it, 20 billion cubic metres of gas is supplied every year. According to Investcafe, in 2012 Turkmenistan featured among the world's major gas exporters.
First published in Russian by Vedomosti