Gas deal to bring benefits, price pressure for China

After securing the long-awaited gas agreement with Russia, China may have to take on more tasks on the energy front while enjoying the benefits, according to analysts. One of the immediate benefits from the landmark deal was seen in China's equity market, where share prices of gas companies jumped across the board on Thursday. "The cooperation will bring new blood to China's domestic gas industry," said Sun Yang, an analyst with the commodity service website, www.chem365.net. Sun expected pipeline construction, equipment manufacturers and gas companies to be boosted by the deal. The 30-year gas supply deal, worked out on Wednesday in Shanghai between China National Petroleum Corp (CNPC) and Russia's state-controlled entities Gazprom, ended a decade of negotiation between the two countries. CNPC said in a statement that the imported natural gas will mainly supply regions around Beijing, cities in northeast China as well as the Yangtze River Delta. According to the agreement, the east route pipeline will start providing China with 38 billion cubic meters of natural gas annually from 2018. The price details have not been disclosed but earlier media reports projected the contract price could be 400 billion U.S. dollars. Even though China has increased its gas imports in recent years, some gas importers ended up in losses due to a lower domestic natural gas price, thus discouraging some companies to increase gas imports. Analysts widely agreed that if China can strike an imported price at 2.19 yuan (about 36 U.S. cents) per cubic meter with Russia, it would be competitive for China. The gas price stands at 2.28 yuan per cubic meter for residential use in Beijing and 3.23 yuan per cubic meter for industrial and commercial use. Dong Xiucheng, director of China Oil & Gas Center, said the gas imports from Russia will accelerate price reform in China, and that raising the gas price might be inevitable in the long run. "The bottom line is to guarantee that gas imports won't incur loss," Dong said, "because in the long run, the price hiking pressure will come from a new pricing scheme for both existing and newly imported gas." He said China desperately needs to improve its energy structure by cutting coal consumption and turning to cleaner energy, as the government vowed to raise the use of non-fossil energy to 15 percent in the country's whole energy consumption by 2020. The natural gas must also account for 15 percent of China's entire energy consumption by 2020, from 5.9 percent now. Lyu Ying, a gas analyst working for chemical industrial website oilgas.com, said the Sino-Russian gas cooperation creates a win-win situation for both countries The agreement enables Russia to expand the market for its gas, which now goes mostly to Europe, while gas-thirsty China can also make up a great part of its gas consumption through its cooperation with Russia. But Lyu also expressed caution that China must not rely too much on Russia for gas imports, but needs to diversify its energy imports. "In the future, China needs to look for more gas supply sources to avoid economic and political restraints arising from over-reliance on a single country," she added.