Monday, December 22, 2014


Russia

What You Need To Know About Russia And China's Gas Deal

Russian President Vladimir Putin (left), Russian Gazprom chief Aleksei Miller (center), and China National Petroleum Corporation Chairman Zhou Jiping pose during the signing of bilateral agreements in Shanghai on May 21.
Russian President Vladimir Putin (left), Russian Gazprom chief Aleksei Miller (center), and China National Petroleum Corporation Chairman Zhou Jiping pose during the signing of bilateral agreements in Shanghai on May 21.
By Luke Johnson
Russia and China have agreed to a 30-year natural-gas deal that will supply 38 billion cubic meters of gas annually to the world's most populous country, according to Gazprom. Here is what is known about the deal.

What did China and Russia agree to?

Gazprom and the China National Petroleum Corporation agreed to a 30-year deal that would supply the People's Republic with 38 billion cubic meters of natural gas annually, starting in 2018. The terms of the deal remain a secret.

Prior to the announcement of the deal, Russian and Chinese companies agreed to a series of projects that indicate further cooperation in the commercial sphere. Russia's state-owned United Aircraft Corporation and China's Comac signed a memorandum to create a large, long-haul airplane to compete with Airbus and Boeing. Russia and China also agreed to build a cross-border rail bridge over the Amur River by 2016.

What is the price of the deal?

The price of natural gas under deal is also, surprise, a secret. Gazprom CEO Aleksei Miller said that the price was a "commercial secret." But he put the total value of the contract at $400 billion. Putin said Russia will invest $55 billion under the deal while China would invest at least $20 billion.

Putin said the price "satisfies both sides. It is pegged to the gas price and gas fuel price, as is the case with all of our international contracts with our Western partners, our partners in Western Europe."

State-owned Izvestia quoted a Gazprom source who said that the price for the gas would be $350-$380 per thousand cubic meters, a number that many other Russian media outlets cited. That is also the price that most European utilities have paid under discounted rates during the past two years, according to Reuters.

However, Clifford Gaddy, a senior fellow at the Brookings Institution who specializes on Russia's economy, says that there are so many components to the contract that individual figures are close to meaningless.

"Looking at something like the price, looking at something like an interest rate on a loan, or a size of the loan or the amount of the prepayment -- any individual item like that really doesn't mean anything unless we were to know the whole array of provisions in this giant deal," Gaddy says. "There's incentives to obviously make it look like this is a good deal for one or the other side. The Russians certainly don't want to look like they're caving in too much."

How long will it take to build pipelines to China?

The agreement states that the gas deliveries will begin in 2018. But the date could be later if both sides disagree on specifics details.

Gaddy says he doesn't know for certain but it depends on how much money both sides spend on it and the political will behind the deal. "We know the Russians can do almost anything in a certain amount of time if they spend enough money doing it -- look at Sochi," he says. "We know the Chinese can essentially do the same if they're really committed to it. So it's not so much about capability as it is about sense of urgency."

What effect will this have on Russian gas sales to Europe and Ukraine?

Not a direct one. According to the press release from Gazprom, the gas will primarily come from two fields in Eastern Siberia, the Kovyktinskoye and Chayandinskoye fields, that are not yet connected to export pipelines. Much of the Russian gas supplied to Western Europe through Ukraine is from fields in Western Siberia.

However, the deal could theoretically have an effect on Western European prices, with Russia showing that it has an alternative market for its gas.

"Shifting some of the potential supply over to Asia gives, at least in theory, Gazprom a stronger negotiating position with the Europeans. It's all about who is most dependent on whom and the strength of your bargaining position," Gaddy says. "We have to distinguish between what all these hypothetical scenarios are based on statements of intention -- even sometimes signed contracts -- with what actually plays out over months and even years in terms of the market situation, the political situation, the security situation." 

Another expert dismisses the idea that there is much significance because of Russia's status as having the world's largest proven reserves. "I don't think it'll make much difference. The Russians have lots of gas, enough to go around for everybody," says Marshall Goldman, a senior scholar at the Davis Center for Russian and Eurasian Studies at Harvard University

Does the timing of this deal have to do with the Ukraine crisis?

It certainly seems that way. While Russia and China have been talking for 10 years and have had disagreements about price, the deal was inked on May 21. Just one day before, the two sides had failed to reach an agreement. Gazprom, meanwhile, has been threatening to cut off supplies of gas to Ukraine on June 1 if it does not receive payment in advance.

"Clearly the Russians are under more pressure to conclude a deal. They want to do it for propaganda reasons. They want to do it for concrete reasons of diversifying away from Western dependence," Gaddy says. "But that doesn't mean that it's not fair. That doesn't mean that the Chinese are putting the screws on them. If so -- if it's an extra price that the Russians bear in this deal -- it's something they're willing to pay because it's important for them right now."

"That's why I think the Russians would want very much to see a big dramatic announcement that: 'Here, we've signed this giant deal with the Chinese. We have alternatives to you Europeans and you Westerners,'" Gaddy explains. "'We are not so vulnerable to your sanctions or your threat of sanctions to the energy sector.'"

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