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Russia-China Sign Mega Gas Deal
May 23, 2014

Russia’s Gazprom and China’s CNPC have signed a historic billion dollar gas contract. The price is not yet known. It was previously estimated to be worth $440 billion. The deal, which has been on the table for over 10 years, will send 38 billion cubic meters of natural gas to China each year starting in 2018 with the potential to expand the annual capacity to 61 billion cubic meters.

China consumed about 170 billion cubic meters of natural gas in 2013 and set a target of up to 420 billion cubic meters a year by 2020. Europe is Russia's largest energy importer as it bought more than 160 billion cubic meters of natural gas in 2013, but tensions and sanctions over Putin's meddling in Ukraine have Russia looking elsewhere. Consequently, the deal is huge for the Russia since natural gas represents nearly 60% of Russia's total exports.

China is said to be unwilling to pay more than it pays Turkmenistan, from where its imports are set to rise. It says Russia has no other market for the vast reserves in eastern Siberia. Russia, for its part, wants to receive no less from China than it does from Europe, and points out that China's demand curve is rising sharply.

For Russia, the deal would be the key to opening up trapped reserves in eastern Siberia, with the giant Power of Siberia pipeline bringing gas from the Chayanda field to China and also to Vladivostok, where other fields can also be brought in to supply a proposed liquefied natural gas plant. Other companies might also be allowed to access this pipeline.

It would also be the sharp end of a wedge between China and Russia's former central Asian republics, which have been making all the running in that part of the world. And China would be able to receive firm pipeline supplies on its doorstep, free from global disruptions and with some security of price.

The two sides have been trying to square the circle to their own advantage in regular meetings that have borne no fruit for perhaps two decades. 

Now, two sides agreed upon a formula with a base price of $350-400/1000 cubic meters, higher than spot prices in Europe but also lower than spot LNG cargoes in north Asia and which will be sufficient for Gazprom to break even. But China knows that due to events in Ukraine, Russia's position in Europe is not as strong as it has been.

Putin’s visit to China comes at a time when, because of the crisis in Ukraine, Russia's most lucrative export market, the EU, is seriously asking itself how to reduce its need for Russian gas and how to undermine Russia's position in its market, including the wider use of reverse flow, and, Russia alleges, preferential treatment to alternative suppliers such as Azerbaijan.

Russia has initiated claims against the EU using the World Trade Organization process, alleging it is being discriminated against and its investments are at risk. 


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