Russia and China Sign $400 Billion Natural Gas Deal

May 21, 2014

China and Russia Reach 30-Year Gas Deal

Jane Perlez

New York Times

President Vladimir V. Putin of Russia, right, and President Xi Jinping of China on Wednesday in Shanghai, where they signed a deal to send gas through a pipeline from Siberia to China. Credit Pool photo by Mark Ralston BEIJING — China and Russia agreed to a major 30-year natural gas deal on Wednesday that would send gas from Siberia by pipeline to China, according to the China National Petroleum Corporation.

The announcement caps a decade-long negotiation and helps bring Russia and China closer than they have been in many years. The contract was driven to a conclusion by the presence of President Xi Jinping of China and President Vladimir V. Putin of Russia in Shanghai for the last two days.

The notice posted on China National Petroleum’s website said that beginning in 2018, Russia would supply 38 billion cubic meters of natural gas each year to China. China will build the pipeline within its own borders, while Russia will be responsible for the development of the fields and pipeline construction in its territory, the notice said.

The notice said the Irkutsk Kovyktinskoye and Chayandinskoye gas fields in Russia would primarily supply the gas.

The notice did not mention price, but experts said hard bargaining by China for a lower price than European countries were paying for Russian natural gas was at the core of the negotiations.

A DEAL OF MUCH CONSEQUENCE

The agreement signed by the presidents of China and Russia on Wednesday, which will provide Russian natural gas to China for the first time, also carries major economic and geopolitical implications:

The pact will bolster President Vladimir V. Putin’s “Eurasian Economic Union” by helping to draw Russia and China closer, forming a more powerful economic counterweight to the United States and Europe. This comes at a time when the Obama administration is trying to isolate Russia economically over the crisis in Ukraine and as American tensions with China are rising over cyberspying and China’s territorial disputes with its neighbors. 

Russia secures a contract, worth an estimated $400 billion over 30 years,that is the biggest in the history of its natural gas industry and provides Mr. Putin with an important new market for natural gas just when the European Union, its most important Western customer, is seeking to diminish its reliance on Russian gas. 

China, the world’s leading consumer of energy, secures an important source of clean fuel at an advantageous price, decreasing the country’s reliance on imported coal and oil. 

The deal is expected to be worth about $400 billion, said James Henderson, a senior analyst at the Oxford Institute for Energy Studies.

The document was signed in the presence of Mr. Putin and Mr. Xi, the Russian news agency Itar-Tass reported.

Mr. Putin told reporters after the signing ceremony that the price of the gas for China was based on the market price of oil, just as it was for European countries.

“The gas price formula as in our other contracts is pegged to the market price of oil and oil products,” Itar-Tass quoted Mr. Putin as saying.

The deal is the largest ever for the Russian natural gas industry, he said.

Russia will invest $55 billion in infrastructure for transporting the gas to China, said Alexei B. Miller, the chief executive officer of Gazprom.

Mr. Putin has been eager to diversify Russia’s gas sales to Asia and away from stagnant European markets. At the same time, he is eager to demonstrate that Russia, in the face of sanctions over the annexation of Crimea, is not dependent on the West.

And Mr. Xi, who has met Mr. Putin seven times since assuming power, was willing to help the Russian leader, said Shi Yinhong, a professor of international relations at Renmin University in Beijing.

Expectations that the deal would be sealed when Mr. Xi and Mr. Putin met on Tuesday were dashed when negotiators from China National Petroleum and Gazprom failed to reach an agreement.

Political considerations, including Mr. Putin’s coming visit to Europe in early June — when he will meet with President Obama and the German chancellor, Angela Merkel — were probably a vital impetus to getting the contract over the finish line, energy experts said.

Mr. Xi and Mr. Putin met on the sidelines of a conference of Asian nations. During his address to the gathering, Mr. Xi proposed a new Asian structure for security cooperation based on a regional group that would include Russia and Iran, but exclude the United States.

The proposal is another indication that Russia and China, though wary of each other, are interested in working together outside the confines of global and regional institutions dominated by the United States.

The final price of the gas stipulated in the document remains a “commercial secret,” Mr. Miller, the chief executive of Gazprom, told the Russian channel TV-Novosti.

A central issue in the negotiations was how to bridge the difference between the premium prices Russia charges European countries and the lower prices that China pays for natural gas from Central Asia, primarily Turkmenistan, said Kenneth S. Courtis, a founding partner of Thames Investment, who was in Shanghai on Tuesday.

The price of Russian gas to Europe is based on fluctuations in oil prices, making it more expensive than gas that China buys from Central Asia, Mr. Courtis said.

Gazprom had indicated that it was not going to bend on the principle of a gas price based on oil prices in the China deal, analysts said. But how to structure that price relationship had appeared to be a major stumbling block.

China National Petroleum asked for equity stakes in the two Gazprom gas fields, much as China had negotiated successfully with other Russian energy companies, Mr. Henderson said. It was not clear whether it succeeded this time.

The geopolitical situation definitely helped smooth the negotiations, said Keun-Wook Paik, associate fellow in energy, environment and resources at Chatham House, a policy institute based in London. Mr. Putin needed to find “an umbrella to show that he’s not completely isolated,” Mr. Paik said.