ST PETERSBURG, Russia, June 17 (Reuters) - Russia has failed to reach agreement on an elusive 30-year gas supply deal with China in time for signing on Friday, with the two sides unable to bridge differences on price.
Russian President Dmitry Medvedev and Chinese President Hu Jintao had hoped to sign the deal, which could be worth up to $1 trillion, at an investment forum in St Petersburg. The agreement would help power Beijing’s booming economy and allow Moscow to diversify exports away from Europe.
Russian Energy Minister Sergei Shmatko said the talks will carry on.
"There should be no rush. We had a good chance to sign a deal during President Hu Jintao’s visit to Russia, but both sides must show flexibility," he told reporters on the fringes of an economic forum in St Petersburg.
"We expect talks to continue."
A source close to the talks said the two sides had not been able to close the gap on price terms, with the Chinese insisting on a fixed price and the Russians pushing to uphold the oil market link that underpins Gazprom’s existing export contracts.
But a senior Russian minister said that the top-level talks still bode well for an eventual deal.
"It is good that we are holding these talks at the top level, which signals that everything is going to be fine," said Deputy Prime Minister Viktor Zubkov, who is chairman of Gazprom , predicting a "viable" result.
The failure to get the 30-year gas supply deal over the line deals a new setback after five years of talks between Russia, the world’s largest energy producer, and China, the largest consumer.
The deal would have foreseen Russia exporting up to 68 billion cubic metres of gas per year to China, compared to expected export volumes to Europe of more than 150 billion cubic metres this year.
Medvedev said after talks with Hu in Moscow on Thursday that the two sides were finalising terms before their joint appearance on Friday at the St Petersburg International Economic Forum, Russia’s answer to Davos.
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Hu has courted Russia as a way of boosting energy security. robust economic growth increasingly forces China to look abroad for oil and gas.
For Russia, the deal would offer Gazprom an alternative market, assuaging Prime Minister Vladimir Putin’s concern of over-reliance on European customers.
But while Hu has made securing energy for the world’s second-biggest economy a diplomatic priority, relations with Russia, the world’s largest energy producer, have not been smooth.
Negotiations have long been stuck on the issue of price, with Russian gas export monopoly Gazprom saying it will not accept a lower effective price than it receives from its core European customers.
Negotiators for China National Petroleum Corp (CNPC) have signalled that they will pay no more than $250 per thousand cubic metres, sources at Gazprom said on Wednesday.
Russia’s gas export monopoly is still targeting a price that will make deliveries to China as profitable as those to European clients, who Gazprom says will pay $500 per thousand cubic metres in the fourth quarter of this year.
Industry officials and analysts said that, given the wide differences on price, political will alone was insufficient to get the deal done, with Russia concerned that offering easy terms to China would undermine its market position in Europe.
"The difference on price was huge," said Mikhail Slobodin, executive vice-president for gas at TNK-BP. "China is very pragmatic. It doesn’t matter about the visit of the Chinese president — it’s a question of economics."
Zha Daojing, a professor of international relations at Peking University, said it was not surprising that a deal proved elusive this time given the complex interests at stake, but the two sides would keep talking.
"The deal is not off. In an absolute material sense, China will need Russian gas," said Zha.
Under early terms agreed over five years by negotiators, Russia would deliver 30 bcm per year from fields on the Arctic Yamal peninsula, the same fields which supply Europe, — via pipeline through the Altai region to northern China.
China would also like to contract an additional 38 bcm from yet untapped fields in East Siberia.
The combined income over three decades, assuming a price of $500 per thousand cubic metres, would generate some $1 trillion.
