Long-coveted prize would allow Russia to switch sales from Europe to the Far East and transform the Eurasian gas market
China National Petroleum Corporation has just made a huge discovery of natural gas in Sichaun Photo: AFP
19 May 2014
Russian president Vladimir Putin may have to accept unpalatable terms from China to clinch a massive gas pipeline deal in Shanghai this week, abandoning red lines defended tooth and claw by the Kremlin for the past decade.
The Russian state gas giant Gazprom said it is just “digits” away from an accord to supply North East China with 38bn cubic metres (BCM) for 30 years as soon as 2018. It is a long-coveted prize that would allow Russia to switch sales from Europe to the Far East and totally transform the Eurasian gas market.
Gazprom’s share price has soared 14pc this month as negotiations reach a climax. Investors are betting that the deal could be the start of an even greater build-up in gas shipments to Asia that would ultimately eclipse sales to Europe, currently 130 BCM, or 60pc of Gazprom’s revenues.
Mr Putin said the deal had “nearly been finalised” and was a perfect fit for both sides: allowing Russia to diversify its sales and letting China plug its “energy deficit” and switch to a cleaner fuel.
Mr Putin has seized on the deal to create the impression that China is allied with Russia in a common front against the West, telling the Chinese press this week that the countries' outlooks are “almost identical” in global affairs.
Beijing did not in fact support Russia at the United Nations over the annexation of Crimea and is irked by the precedent of popular referendums used to justify secessions - given its own simmering problems with the Uighurs in Xinjiang - but it has chosen to let the claims pass.
The gas contract would insulate Russia from serious damage as the EU draws up plans to slash its dependence on Gazprom, partly by switching to liquefied natural gas (LNG) from North Africa, Qatar and ultimately North America, but also by opening the way for shale gas development. Yet there is every sign that Beijing intends to drive a hard bargain while Mr Putin so badly needs the political cover of a Chinese deal.
“The reality is that China now holds the whip hand and they will drive a very hard bargain. For them this is just commerce,” said Ian Bond, from the Centre for European Reform.
Russian daily Izvestia said the price will be in a band from $350 to $380, slightly below the European average of $380. The key question is whether it will also contain European-style clauses linking gas prices to the spot price of Brent crude.
“The European pricing mechanism has been the key sticking point for a decade. China has resisted this but now it has a fantastic opportunity to force the matter,” said Professor Alan Riley, from City University.
China needs natural gas to wean its economy off coal-fired power stations choking the major cities, but the balance of advantage has gradually been swinging in Beijing’s favour. China is rapidly becoming the dominant power in central Asia and has opened a pipeline from Turmenistan that supplies more than 20 BCM of gas, rising to 65 BCM by 2020.
China National Petroleum Corporation has just made a huge discovery of natural gas in Sichaun, possibly 440 BCM. PetroChina is cranking up shale development and will deliver the first 2.5 BCM as soon as next year, aiming to reach 11 BCM by 2020. China is also building up its network of terminals for LNG imports, expected to become much cheaper as Australian shipments enter the market and Japan frees up LNG supply by restarting many of its nuclear reactors.
Russia may have missed its chance to lock in the best terms for its East Siberian gas. “The two sides have been playing a game of poker for 10 years, each thinking they have the better hand, and neither willing to do the deal,” said one adviser close to the talks.
China and Russia have seemed close to a trophy gas deal before, only to see it fall apart at the final stage. The accord looks more certain this time but Gazprom still needs to invest up to $30bn to build the pipeline, much of it through the harsh geography of the Siberian tundra. It is likely to pass through the Amur region before feeding into Beijing.
This would not be the first time in Russian history that an entanglement in the West forced it to give ground in the East. The Regent Sophia had to cede the Amur basin conquered long before from China after Russian forces were drawn into a disastrous war with the Crimean Tatars in the 1690s.
Russia reconquered the Amur later in the 19th century in breach of its treaty with China - an act that has not been forgotten or forgiven in Beijing.
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