Vladimir Putin has witnessed the signing of a Russia China mega gas deal estimated to be worth more than $400 billion. The 30-year deal will be welcomed by the Kremlin, which has been concerned about over-dependency on European customers.
The agreement was signed at a Shanghai Conference on Interaction and Confidence Building Measures in Asia (CICA). The two countries announced that Russia is expected to deliver approximately 38 billion cubic meters of natural gas annually to China, starting in 2018.
A political triumph for Putin
With the European Union imposing sanctions on Russia start to bite and threaten grow amid the Ukraine/Crimea crisis, the Chinese deal now places the country in a much stronger position. An escalation of the conflict could cost Russia $115 billion in 2015, analysts have estimated.
The deal, between China National Petroleum Corp (CNPC) and Russia’s Gazprom, is the result of more than ten years of negotiations which had got stuck in an impasse due to pricing disagreements.
Over the last decade China has signed deals with Turkmenistan, which is currently its largest foreign supplier of natural gas, Myanmar and some other nations.
Gazprom shares immediately increased by 2% on the news.
Details of agreement unclear
Although seen as a major political triumph for Putin, commercially it is unclear how good the deal is for Russia.
China definitely had the upper hand in negotiations, given their awareness of Russia’s international isolation.
Mr. Putin said:
“This is indeed a historic event for the gas sector of Russia and of the Soviet Union,” he said. This is the biggest contract in the history of the gas sector of the former USSR. I want to stress that there was hard work done on the expert level. Our Chinese friends are difficult, hard negotiators.”
The contract’s pricing has yet to be disclosed, as have some other terms.
“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.”
Up front lump sum – solved or not?
During the decade-long-negotiations, another sticking point had been Russia’s insistence that China pay a lump sum up front in order to cover the infrastructure costs.
According to Alexei Miller, Gazprom’s CEO, the down payment aspect of the talks still remain unresolved.
However, Mr. Putin said China will put up $20 billion for gas development and infrastructure. Putin added that the price agreed was similar to those that Gazprom charges its European customers. If this is the case, analysts wonder “Then why are the details undisclosed?”
In an interview with Reuters, Gordon Krwan, head of Asian oil research at Nomura, said “Given the EU sanctions that could potentially hit Russia, I don’t think Gazprom is in a position to strike a very high price for its gas.”
Krwan added that China must have been driving a hard bargain after CNPC was rocked by a corruption investigation in 2013, and as President Xi Jinping seeks to eradicate graft across the country.
Infrastructure spending
The natural gas will we transported along a newly-built pipeline connecting the Kovyktin and Chayandin eastern Siberian gas fields to China’s northeast, the Beijing-Tianjin-Hebei metropolitan area in the north, and the Yangtze river delta in the east.
According to Mr. Putin, Russia will invest approximately $55 billion in exploration and pipeline infrastructure to the Chinese border. CNPC said it will build the pipeline within China.
