Fri, May 23, 2014 - Page 15 News List

Russia gas deal to benefit PetroChina

Bloomberg

PetroChina Co (中石油), China’s biggest oil and gas producer, stands to win from Russia’s US$400 billion deal to supply natural gas to China, as it will provide gas at a price lower than had been expected.

“The deal is an economic game-changer as PetroChina lands an attractive gas deal at a price that carries a 10 percent discount to what EU countries are currently paying, and a 40 percent discount to current LNG prices,” said Gordon Kwan (關榮樂), head of oil and gas research at Nomura International Hong Kong Ltd.

China National Petroleum Corp (CNPC, 中國石油天然氣), PetroChina’s state-owned parent and Russia’s OAO Gazprom on Wednesday signed the agreement in Shanghai to supply 38 billion cubic meters of gas annually over 30 years. PetroChina runs most of CNPC’s pipeline, refining and marketing businesses.

Oleg Maximov, an analyst at Sberbank CIB, said the outline provided by Gazprom suggested a price of US$350 to US$380 per 1,000m3.

“This could potentially lift PetroChina’s earnings per share estimate by about 10 percent, once gas sales start in 2018 or 2019,” Kwan said.

China-based natural gas distributors, such as China Gas Holdings Ltd (中國燃氣控股) and Beijing Enterprises Holdings Ltd (北京控股), also stand to gain as their profits are linked most closely to gas sales.

Supplies of US LNG and the development of China’s shale gas projects are also expected to alleviate questions about supply, Kwan said.

Shares in PetroChina rose 1.1 percent in Hong Kong to its highest since November last year. The whole gas sector was also boosted by the news, with China Gas jumping 6.3 percent and Beijing Enterprises gaining 6.5 percent, the most since June 11, 2010. Changchun Gas Co Ltd (長春燃氣) surged the maximum allowed 10 percent in Shanghai and Shenzhen Gas Corp Ltd (深圳燃氣) rose 6.1 percent.

“The gas deal is positive across the board for natural gas distributors in China, as the increased supplies and relatively modest import prices will bring every player extra earnings down the road,” UOB Kay Hian Ltd (大華繼顯) analyst Shi Yan (石燕) said in Shanghai.

A steady source of Russian gas is expected to help China meet growing demand at a time when it is struggling to exploit its own natural gas reserves, according to a note from Morena Skalamera, a research fellow at Harvard Kennedy School’s Belfer Center for Science and International Affairs.

“A reduction of China’s heavy dependence on coal through affordable gas expansion will be a critical step in curbing the country’s pollution and tackling global climate change,” Skalamera said in the note.

China plans to increase natural gas consumption to 9 percent of its total by 2017 and keep coal consumption to below 65 percent, according to a statement from China’s National Development and Reform Commission on Friday last week. China’s natural gas consumption amounted to 5.2 percent of total energy consumption in 2012.

The Russian supply will be sufficient to meet almost one-quarter of China’s current consumption and about 10 percent of estimated demand by 2020, Kwan said.

The gas deal, which provides Russia the justification to build an LNG terminal in Vladivostok that would be able to compete with future US LNG supplies to Asia, may provide gas importers and utilities in Taiwan, Japan and South Korea with the leverage to negotiate better prices, he said.

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