China, Russia sign gas deal worth US$400b after decade of talks
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CHINA signed a 30-year contract with Russia yesterday to buy natural gas from eastern Siberia. The deal, said to be worth US$400 billion, was the culmination of more than a decade of negotiations.
Russian state gas exporter Gazprom will start supplying gas to China National Petroleum Corp in 2018 via a new eastern pipeline linking the two countries. Annual supply volumes will grow gradually until they reach 38 billion cubic meters, CNPC said. That’s equivalent to about a quarter of China’s current annual demand.
The deal signed in Shanghai between the two companies was witnessed by Chinese President Xi Jinping and his Russian counterpart Vladimir Putin. The agreement was clinched just hours before Putin ended a two-day visit to Shanghai, where he attended a regional security summit.
The contract is worth a total of US$400 billion, Gazprom CEO Alexei Miller told Russian news agencies.
“This is the biggest contract in the history of the gas sector of the former USSR,” Reuters quoted Putin as saying.
“Our Chinese friends are difficult, hard negotiators,” Putin said, noting that talks went on until 4am.
“Through mutual compromise we managed to reach not only acceptable, but rather satisfactory, terms on this contract for both sides. Both sides were in the end pleased by the compromise reached on price and other terms,” Putin said.
Russia will invest US$55 billion in fulfilling the contract while China will invest at least US$20 billion, Putin told Russian reporters in Shanghai.
Insiders said Gazprom refused to go below US$350 per 1,000 meters, Reuters reported. That compares to a price range of US$350-US$380 most European utilities pay under discounted long-term contracts signed in the last two years.
Putin said yesterday the formula was similar to the European price tied to the market value of oil and oil products.
It appears to be closer to the level Russia wanted, AP quoted analyst Xizhou Zhou of IHS Energy as saying.
In exchange, the two sides dropped a requirement for prepayment that has featured in Chinese purchases of Russian oil in the past, he said.
“This higher price reflects China’s willingness to pay more for cleaner fuel,” said Zhou in a report.
China is boosting the use of the cleaner-burning fuel as it seeks to address its growing appetite for energy while tackling pollution associated with coal burning.
China’s gas consumption rose 13.9 percent last year to 167.6 billion cubic meters. More than 30 percent of its gas was imported.
The new gas pipeline at the center of the deal will be in addition to an existing oil pipeline linking eastern Siberia and China’s northeastern province of Heilongjiang.
Russia plans to invest US$55 billion in exploration. CNPC said it would build the Chinese section of the pipeline.
Developments in the global energy market during the past year gave China an edge in the negotiations, some analysts said.
Gazprom’s European price has been cut to compete with supplies from Norway and Africa, while US exports are set to boom because of its shale gas revolution.
Putin has been courting new gas buyers to bolster its largely energy-driven economy amid growing tensions between Russia and the West.
Europe has threatened to cut gas imports and reduce its dependence on Russia because of the Ukraine crisis.
Alexander Lukin, deputy head of the Russian Diplomatic Academy under the foreign ministry, said: “We will be able to show to Europe that we have other customers,” according to the RIA Novosti news agency
The Russian gas will supply users in China’s northeast, in the Beijing region and in the Yangtze River Delta that includes Shanghai.
According to a joint statement following talks between Xi and Putin, the two nations agreed to “establish a comprehensive energy cooperation partnership.”
Gazprom shares jumped over 2 percent in Moscow yesterday in response to the news, but lost part of the gains in late trading.
Li Zhonghai, a researcher with the Chinese Academy of Social Sciences, told Xinhua news agency that the Sino-Russia gas deal enhanced energy cooperation and improved the bilateral relationship.
“The deal is a milestone,” Liu Yijun, professor with China University of Petroleum, told Xinhua.
“The contract reflects the final compromises from the two country’s enterprises, especially in the pricing method.”
Feng Yujun, an expert on Russia, said the deal helped Russia realize simultaneous gas supplies to the Asia-Pacific and Europe, which will balance the natural gas market in Eurasia.
Importing 38 billion cubic meters from Russia will satisfy China’s demand for clean energy to tackle air pollution and pursue sustainable development, Xinhua said.
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