Gas Deal With Russia Could Provide Greater Price Stability in China

Fitch Ratings says possible additional natural gas supplies from Russia's Gazprom to China via the Altai pipeline would help China to materially close its demand-supply gap, providing greater gas price stability in the country.

Gazprom and China National Petroleum Corp., earlier this month, signed a framework agreement to supply about 1 trillion cubic feet of gas a year to western China. This follows an agreement in May 2014 to supply gas to eastern China.

While no pricing details for the latest agreement are available, Fitch considers it unlikely that the price would be much higher than the eastern route agreement — at or about $10 per thousand cubic feet. This is materially lower than the cost of imported liquefied natural gas in Asia. If fulfilled at their full volumes, the two gas supply contracts would make Russia the single largest gas supplier to China, overtaking Turkmenistan.

Progress in securing piped gas from Russia and Central Asia is critical to achieving the government's target of increased gas use in China, as domestic production growth has been slow. Aside from ensuring sufficient supply, the contracts with Russia will help stabilize gas prices in China over the medium term. The Chinese government has been raising the city-gate prices for gas to increase economic incentives for more domestic production as well as to compensate for the higher share of LNG in the supply.