Global Insight Perspective | |
Significance | Hou Chuangye, vice-general manager of PetroChina's gas and pipeline subsidiary, was surprisingly candid at an industry seminar last week in revealing that the company has agreed to pay US$195 per 1,000 cm for gas supplies from Turkmenistan via the planned Central Asia-China gas pipeline. |
Implications | The higher-than-expected price will surely stretch what Chinese consumers are willing to pay, but it will also embolden Turkmenistan in pushing for a higher price for its gas exports to Iran, and complicate Gazprom's efforts to agree on its own price with PetroChina to implement a preliminary Russia-China gas supply deal. |
Outlook | The price for Turkmen gas supplies to China is likely to be adjusted somewhat before the gas actually begins to flow, but the establishment of an "indicative" price for Central Asian gas seems certain to further aggravate some ongoing price and supply disputes in the region. |
A Surprising Disclosure
Turkmenistan and China have greatly increased their energy co-operation over the last two years, ever since the April 2006 preliminary gas supply deal between the two countries. Perhaps seen at the time as merely a bargaining ploy in their attempts to reach a deal with Russia's Gazprom (Turkmenistan on an export price, China on an import price), the agreement has instead become the basis of their strengthening economic ties. Despite the expected exorbitant cost of a pipeline connecting Turkmenistan to China and with a number of questions—including that of gas price—still seemingly unanswered, construction nevertheless began in August last year.
Hou Chuangye, vice-general manager of PetroChina's gas and pipeline subsidiary, has now come forward with a surprising answer to the gas price question. In an industry seminar in Shenzhen (China) last week, Hou said that China will pay US$195 per 1,000 cm for Central Asian gas. He explained that the price is calculated on an oil price of US$45/b (compared to current average NYMEX prices of around US$90/b) using a formula that allows the price to change whenever the oil price fluctuates significantly, and added that China will also have to pay a transmission fee of US$50 per 1,000 cm. The pipeline is slated to run 8,000 km from Turkmenistan to China's Guangdong province, with a capacity of 30 bcm/year. The first segment will run approximately 1,818 km, through Uzbekistan and Kazakhstan to China's Xinjiang province, while the second segment will run through the Chinese cities of Erdos, Urumqi, Lanzhou, and Xian, then south to Guangzhou, and possibly on to Hong Kong. PetroChina said in August that the pipeline, which is expected to be finished by 2010, will need an estimated total investment of around 102 billion yuan (US$13.63 billion).
Given the company's usual reticence in disclosing details of a commercial arrangement, and because the price is higher than expected, Hou's revelation has surprised many. Earlier reports had suggested that China had agreed to pay around US$90-US$100 per 1,000 cm for Turkmen gas. However, this predated a move by Turkmenistan to increase its gas export price by 30%, which Gazprom—Turkmenistan's largest export customer—willingly accepted, somewhat surprisingly, in November (see "Related Articles"). Gazprom is now paying US$130 per 1,000 cm in the first half of 2008, and US$150 per 1,000 cm in the second half.
Establishing the "Market" Price?
Traders attending the conference told Dow Jones last week that Hou likely disclosed details of the gas formula to see if the market in Guangdong would accept these prices; he appears to be testing how much they would be willing to pay. Hou said that PetroChina—which plans to produce 13 bcm/year in Turkmenistan under a production-sharing deal and buy a further 17 bcm/year for 30 years—will pay a duty-adjusted price of 2.02 yuan (US$0.279) per cm for Turkmen gas on the Chinese border, with the price for end-users in China averaging more than 3.1 yuan per cm. As such, the piped gas from Turkmenistan would be more costly than LNG transported by road from Xinjiang to Guangdong, which is currently supplied by Xinjiang Guanghui Industry Co. for 2.9 yuan per cm. This latest price agreement would seem to need further adjustment to make it truly competitive with other supply sources.
Away from China itself, Hou's revelation will surely affect other regional gas price and supply negotiations. Perhaps most important in the current situation, this "indicator" price will put additional pressure on Iran to pay more for imported supplies from Turkmenistan. With both China and Russia having agreed to pay more, Turkmen officials are no doubt eager to press Iran to pay more than the current US$100 per 1,000 cm. While Iran can hope to limit a price increase since—unlike Russia and China—it does not need to factor in transit costs, it seems likely that Turkmenistan will be further emboldened in pushing for such an increase.
There should also be ramifications for Russia's own gas price negotiations with China. Although a preliminary supply and pipeline agreement was signed by the China National Petroleum Corp. (CNPC) and Gazprom in March 2006, there has been little progress since then, with a dispute over price the main hang-up. Gazprom is reportedly seeking something approximating its (previous) average price for gas exports to Europe, around US$250 per 1,000 cm, while CNPC has been angling for a price closer to US$100 per 1,000 cm. The expected increase in Russian gas prices to Europe this year could prompt Gazprom to up its price demand for China, but the disclosure of the lower price that PetroChina will pay for Turkmen gas supplies could further stymie any progress in clinching a deal. In the meantime, China does not appear to need the Russian gas until at least 2010 and possibly 2012, based on recent discoveries in China itself, and Gazprom is preoccupied in trying to secure control over gas exports from the ExxonMobil-led Sakhalin-1 project in Russia's Far East, hoping to avoid having Russian gas compete against itself for the Chinese market.
Outlook and Implications
The revelation of the expected price for Turkmen gas supplies to China via the Central Asia-China pipeline will have knock-on effects, not only for Chinese consumers—who appear sure to object to the higher prices—but also for the Iranian government, which may have little choice but to relent to pay more for Turkmen gas supplies in order to restore gas volumes that are currently being withheld by Turkmenistan. The US$195-per-1,000-cm price for Turkmen gas to China will also provide an indicative market price on which Russia and China can continue negotiations on reaching their own price deal to support their preliminary supply agreement. Whether Hou's price revelation helps Russia or China more in achieving their own price goals in those negotiations remains to be seen.
What is clear is that the higher-than-anticipated announced price for Turkmen gas to China will be a boon for Central Asian producers. In the past few years, Turkmenistan, in particular, has seen its leverage in gas price negotiations increase exponentially, as the country's importance as a key supplier in the Russian-Ukrainian January 2006 gas deal (and, by extension, its role as a major underwriter of European energy security) became clear. Uzbekistan and Kazakhstan, in turn, have seen the value of their gas supplies rise on the back of Turkmenistan's decision to increase its gas export prices, prompting these gas-rich Central Asian states to increase their own gas export prices. Likewise, the domino effect of the halt in Turkmenistan's gas exports to Iran, affecting Turkey and Greece further downstream, has shown the importance of Turkmen supplies in that gas supply chain. Thus, Turkmenistan appears poised to reap the rewards by forcing Iran to the negotiating table to pay a higher price for the gas it imports from Turkmenistan.
Related Articles
Iran: 16 January 2008: Iran Threatens Turkmenistan with Court Action Over "Immoral" Gas Supply Halt
Turkmenistan: 9 January 2008: Is Turkmenistan Being Truthful About the "Operational" Reason for Halt in Gas Supplies to Iran?
China: 28 December 2007: PetroChina to Invest Additional US$2.2 bil. in Gas Pipeline from Central Asia
CIS: 28 November 2007: Gazprom Consents to Increased Turkmen Gas Prices; Ukraine to Face Higher Prices in Turn
Russia: 19 November 2007: Gazprom, CNPC Agree on Gas Pricing Mechanism for Russia-China Gas Deal
Turkmenistan: 31 August 2007: Construction Kicks Off for Gas Pipeline Linking Turkmenistan to China
Turkmenistan: 18 July 2007: Planned Gas Pipeline Advances with Turkmenistan-China Gas Deals
Turkmenistan: 22 November 2006: CNPC Awarded Exploration Drilling Rights to Reputed Enormous Gas Field in Turkmenistan
Turkmenistan: 4 April 2006: Eastward Orientation? Turkmenistan Signs Deal to Supply Gas to China
Russia: 22 March 2006: China Gas Pipeline Deal Gives Russia Supply-Side Security