Cornered by western sanctions, Russian President Vladimir Putin oversaw the signing of a massive 30-year deal between Gazprom and China’s CNPC on 21 May that calls for the Russian gas monopoly to supply China National Petroleum Corporation with 38 billion cubic metres of gas annually.
The price China is paying for Russia’s gas was not disclosed. But Gazprom CEO Alexei Miller said the contract is worth a total of $400 billion. Gas is due to begin flowing to China as early as 2018.
Gazprom and CNPC have sought a long-term gas-supply contract for a decade but the price has been a sticking point in the negotiations. Tough price negotiations continued into the final hours of a two-day visit by Putin to China.
“That’s a big deal that has been in talks for almost a decade,” Slava Smolyaninov, chief strategist at UralSib Financial Corp in Moscow, told New Europe on 21 May. “Actually the volume will suffice. This volume is going to be contracted out of Sakhalin and a couple of Siberian fields,” he said.
Smolyaninov explained that the gas that will be exported to China will not be competing with Gazprom’s supplies to Europe. “It’s a completely different resource base for now – what has been signed. Politically, that appears to be very important obviously in the run up with all the tensions that exist with the European Union but speaking of substitution would be incorrect all together,” he said.
Relations between Moscow and Brussels have been tense following Russia’s annexation of Crimea and a gas price dispute between Russia and Ukraine has raised concerns of another gas crisis disrupting Russia gas supplies to Europe.
Alexei Kokin, a senior oil and gas analyst at UralSib Financial Corp, told New Europe earlier that Gazprom is hoping that a deal with China, subject to pricing and other terms, may give the Russian company a chance to reduce reliance on the European market.
Russia will invest $55 billion in fulfilling the contract while China will invest $22 billion, Putin said in Shanghai. He added that the gas price would be based on a formula linked to that of oil and oil products.
Plans call for building a pipeline to link China’s northeast to a line that carries gas from western Siberia to the Pacific port of Vladivostok. The development of a gas center on the Pacific will allow Russia to export to alluring markets in Japan and South Korea.
China appeared to have the upper hand in negotiations with Russia since it already imports about 20 billion cubic metres of gas from Turkmenistan. Moreover, China’s prospects of cheaper imports have risen on the back of rising supplies from the Central Asian republic and growing North American gas exports. China’s imports from Turkmenistan account for about half of its total gas imports, and the two countries signed an agreement last year to ramp up gas exports to 65 billion cubic metres by 2020.
Russia and Gazprom needed to be sure that China would commit for the next 30 years to buy at least 38 billion cubic metres of gas per year because otherwise Gazprom beginning to develop east Siberia would be extremely risky.
follow on twitter @energyinsider