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Financial Times: China’s LNG deals ‘good’ for Gazprom discussions

By Peter Smith in Sydney
Published: September 10 2007 03:00 | Last updated: September 10 2007 03:00

Alexander Medvedev, Gaz-promdeputy chairman, said agreements for up to A$55bn (US$45.42bn) worth of Australian liquefied natural gas signed by PetroChina last week had strengthened the Russian company’s hand in talks on the sale of some of its own huge reserves of gas to China.

“I have a feeling that [China’s deals with Australia] were based on the LNG market price inthe region,” said Mr Medvedev, who was part of the Russian business delegation to the Pacific Rim summit in Sydney, which ended yesterday.

“China paying market prices is good for our discussions,” said Mr Medvedev, who added that Gazprom was negotiating the sale of 68bn cubic metres of gas a year to China. China’s pressing energy needs for its industrial and residential markets have forced it back into the global natural gas market in search of cleaner burning – though potentially more expensive – fuels.

After long talks on price, Australia’s Woodside Petroleum on Thursday clinched the country’s biggest export contract when it signed an outline agreement to sell up to A$45bn worth of LNG to PetroChina.

The Chinese oil major had earlier signed a 20-year agreement with Royal Dutch Shell for LNG from the Gorgon project off Western Australia for an undisclosed sum, thought to be between A$7bn to A$10bn. Both deals were overseen by Hu Jintao, the Chinese president, who was also in Australia for the summit.

China signed its first long-term LNG supply deal five years ago, also with Australia, but has since balked at paying the higher world prices that have prevailed in most markets since.

Gazprom’s talks with China have been complicated by US oil group ExxonMobil’s efforts to sell up to 8bn cubic metres a year of gas to China from the Exxon-led Sakhalin 1, Russia’s last big foreign oil and gas project.

However, Exxon’s plans could be frustrated byMoscow or its fellow partners in Sakhalin 1, which include Russian state-owned oil group Rosneft. Moscow wants Sakhalin 1’s gas to supply the domestic market, which would help Gazprom’s talks with China.

Mr Medvedev cited “corporate governance issues” when questioned on why Gazprom was unhappy about Exxon’s plans. “The priority [for Sakhalin 1] is to supply the local market.”

He said Gazprom would deliver gas to China four years after it signed a commercial contract giving it time to construct a pipeline for delivery.

“We need to fix commercial terms that define volumes of potential deliveries and price. We won’t produce gas before we agree to sell.”

Mr Medvedev added that India and Korea were also interested in Russian gas although delivery to those markets was more difficult. He predicted that gas will begin to flow by 2014 from Kovykta, the massive field in east Siberia that Gazprom operates with TNK-BP, the Russian-British oil major.

Mr Medvedev said that an updated evaluation of Kovykta’s potential and a proposed exchange of assets with BP was “planned to be finalised in October”.

“Kovykta is only one gas field. There are three potential gas producing centres in eastern Siberia, or four including Sakhalin,” he said.

Gazprom said it was in discussions with large oil and gas companies to expand its presence in the liquefied natural gas market in south-east Asia and Australia.

Copyright The Financial Times Limited 2007

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