BP will sign a deal worth around $20 billion on Tuesday to supply China National Offshore Oil Corporation (CNOOC) with liquefied natural gas (LNG), Chief Executive Bob Dudley said at a conference in Moscow.
"It is a 20-year supply agreement on LNG. It is a fair price for them and a fair price for us. It is a good bridge between the UK and China in terms of trade," Dudley said.
BP will likely source much of the LNG from its U.S. export plant at Freeport, Texas, where it owns 4.4 million tonnes per year (mtpa) of export capacity, having started negotiations with CNOOC earlier this year.
The deal, expected to boost China's LNG intake by at least 1.5 million tonnes per year, or about 26 cargoes, cements China's role as a key buyer of U.S. gas, industry sources said.
China has emerged as one of the biggest beneficiaries of cheap U.S. natural gas that in the coming years will be piped to Gulf Coast plants and liquefied for shipment abroad in tankers.
Last year CNOOC signed an LNG supply deal with Britain's BG Group that will deliver cargoes from U.S. and Australian export plants under a dual-pricing scheme, reflecting cheap U.S. gas as well as a more expensive link to crude oil prices.
Its latest deal with BP will have a similar pricing structure, following sustained efforts by China's National Development and Reform Commission to cap a surging fuel import bill.
"After missing out on a deal to sell LNG to Taiwan last year, BP has now found a Chinese buyer for its Freeport volumes, which in pricing terms will have elements of U.S. as well as oil pricing," an industry source said.
Last month China locked in a 30-year piped gas supply deal with Russia's Gazprom worth around $400 billion.
BP already ships cut-price LNG to CNOOC from its Indonesian export plants under an agreement signed years ago.
China's ability to command lower prices comes at a time when the world's two biggest LNG buyers, Japan and South Korea, are being hit hard by high import costs, perhaps underscoring China's status as a market which no producer can afford to miss.
Energy demand in Japan and South Korea is not expected to log nearly the same growth rates as China, especially as authorities re-orient towards a more gas-based economy.
BP currently has access to LNG produced in Trinidad, Angola, Egypt and Indonesia, with two new export facilities due to come on stream in Australia in coming years.
The United States is producing record amounts of natural gas thanks to a drilling boom, and more than a dozen export projects have been proposed, including Freeport, where exports are due to start in early 2018.
Long-term supply deals lasting 20-years or more are becoming increasingly rare as buyers hold out hope that a tide of new supply from 2018 will help bring down prices.