China, Russia Clinch Natural Gas Supply Pact

22 May 2014

China and Russia have reached a landmark US$400 billion gas supply deal that would span over the next three decades. The landmark agreement was confirmed on Wednesday, toward the end of Russian President Vladimir Putin’s trip to China.

Earlier during Putin’s visit, it had appeared that the negotiations between the China National Petroleum Corporation and Russian state-owned energy giant Gazprom were not going to yield a deal in time, and would instead be pushed down the road.

However, the two sides ultimately confirmed on Wednesday that they had reached an accord, suggesting that past disagreements over the pricing of Russian-sourced gas had reached some type of resolution.

Gazprom, for its part, had reportedly been asking that the gas price to be linked to that of oil, which is currently high. China, in turn, had long been pushing Russia to lower its price, a demand that had proven difficult for Gazprom negotiators to meet, given that the EU – one of Russia’s top gas clients – pays significantly higher fees. This, in turn, has helped the state-owned company provide gas cheaply to domestic consumers.

Details regarding the exact terms of Wednesday deal were limited as Bridges went to press on Thursday, with analysts unclear on what was the final agreed price of gas. Some media reports have cited the Russian president as saying that the gas price will indeed be linked to that of oil.

The resulting pact was welcomed by Putin on Wednesday as an “historic event” for his country’s gas sector. The deal, he added, was the biggest contract his country had ever achieved in this area.

The implementation of the accord is expected to take years, with 2018 being set as the planned date. According to China National Petroleum, Russia will start exporting 38 billion cubic metres of natural gas to its Asian neighbour. Each country will be responsible for building the part of the pipeline that falls within their respective borders, and Russia is set to contribute over US$50 billion to develop the necessary infrastructure.

Shifting ties?

The timing of the gas deal – as Russia remains under heavy diplomatic fire from many of its Western partners over its handling of the Ukraine crisis – has prompted analysts to question whether this initiative is part of a broader Russian effort toward deepening its Asian alliances.

Chinese leaders, for their part, said this week that they are interested in increasing their engagement with Russia, with President Xi Jinping saying on China National Radio on Tuesday that Beijing is “not satisfied with existing achievements.” Furthermore, he called for the two sides to “unswervingly and unflinchingly” work toward advances in all areas of cooperation.

The talks for a bilateral gas deal had been underway for a decade. However, the initiative had taken on an increased level of urgency for Russian industry negotiators over the past several months, given that the EU – the country’s largest natural gas customer – has made clear in recent months that it hopes to diversify its energy sources away from Russia.

The heavy reliance of some EU member states on Russian-provided energy has made it difficult for the 28-nation bloc to impose sanctions on Moscow in response to Russia’s recent annexation of Crimea, a peninsula that had been part of Ukraine.

While some sanctions – such as visa bans and asset freezes – have been imposed on select officials involved in the Ukraine crisis, the EU has been hesitant to take stronger measures that would target sectors of the Russian economy, given the potential for Russia to cut off gas supplies in retaliation.

Meanwhile, the continued row between Kiev and Moscow over gas prices has also raised questions over whether the EU may suffer the fall-out, given that approximately half of the gas Europe receives from Russia passes through Ukraine.

Arseniy Yatsenyuk, the prime minister of Ukraine, sent a letter to the European Commission earlier this week criticising the “politically motivated” price that his country is currently required to pay Russia for gas. Ukraine currently buys a set volume of gas from Russia per year, at a price of US$485 per thousand cubic metres of gas.

The Eastern European country, already struggling to pay its billions in existing debt to Gazprom, is asking for that price to be lowered to US$268.5 per thousand cubic metres. Russia, in turn, has warned that it will only supply Ukraine with gas from June onward if the latter starts prepaying for its supply.

European officials have lately said that a proposed trade pact with the US, known as the Transatlantic Trade and Investment Partnership (TTIP), could be one way to lower the 28-nation bloc’s dependence on Russian energy supplies. US officials, in turn, have said that TTIP could have the benefit of making it easier to issue export licenses for liquefied natural gas to Europe.

ICTSD reporting; “Russia, China Fail to Reach Gas Deal,” WALL STREET JOURNAL, 20 May 2014; “China and Russia sign huge gas supply deal, pricing unclear,” REUTERS, 21 May 2014; “China and Russia Reach 30-Year Gas Deal,” THE NEW YORK TIMES, 21 May 2014; “Ukraine-Russia payment dispute augurs new gas crisis,” EURACTIV, 21 May 2014; “Moscow ups stakes in gas dispute,” FINANCIAL TIMES, 8 May 2014.

China, Energy
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