Russia-China gas deal creates benchmark for global market

Thu May 22, 2014 7:46am EDT
 
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By Henning Gloystein

LONDON (Reuters) - The keenly priced gas deal signed this week between Russia and China will create a new price benchmark for global markets that puts cost pressure on other producers because consumers have a growing number of supply sources to choose from.

China and Russia signed a long-awaited $400 billion gas supply deal this week, providing energy-hungry China with a major source of fuel and opening up a new market for Moscow as it risks losing European customers over the Ukraine crisis.

Russia's state-controlled Gazprom GAZP.MM has so far declined to say at what price the deal was struck, but industry sources say it is between $350-$380 per thousand cubic meters.

That would be similar to what most European utilities pay under discounted long-term contracts signed in the last two years, and several sources said it is as low as Gazprom could have gone before making a loss.

Fitch Ratings said the deal "sets a new benchmark for what China is willing to pay for natural gas over longer term contracts".

The deal also opens up a huge new market for Gazprom, which so far generates around 80 percent of its revenues from Europe, where demand is stagnating and profits are falling.

"With European gas demand growth uncertain and the Ukraine crisis leading to calls for Europe to reduce its reliance on Russian gas, Gazprom now needs a 'new Europe'- enter China," said Stephen O'Rourke of energy research and consultancy firm Wood Mackenzie.

A Russian government decision last year to end Gazprom's sole right to export gas has also spurred it to lock in the deal with China, dropping its price closer to levels favored by Beijing.   Continued...