Ending a decade of often-contentious negotiations, Russia and China on May 21 signed a 30-year, $400 billion deal that will initially send around 38 billion cubic meters (bcm) of natural gas per year to Chinese markets, with plans to later expand that to 60 bcm/yr as pipeline capacity expands. The agreement was finalized by Chinese President Xi Jinping and Russian President Vladimir Putin during Putin’s visit to China this week.
China has been seeking new supplies of gas to feed its rapidly growing market, both for domestic heating and industrial and power use. The nation needs to ease its dependence on coal for environmental reasons, but its drive to build up gas-fired capacity has been constrained by strong domestic heating demand and the need to import expensive liquefied natural gas.
Russia, meanwhile, has been looking for new customers to move away from dependence on Western Europe, a market that has been roiled by the crisis in Ukraine. The two countries have been talking on and off since the 2000s, but China’s refusal to pay Gazprom’s traditional oil-indexed prices has long been the main sticking point.
Significantly, pricing details of the contract were not released, and Gazprom CEO Alexey Miller told Russian media that the price China will pay is a “commercial secret.” The total price and projected volume, however, suggest a price in the range of $10/MMBtu, in line with prices charged under recent discounted contracts with European buyers and reportedly what China was seeking during negotiations. Observers suggested Chinese negotiators might have taken advantage of Russia’s current isolation over Ukraine to close the deal.
The agreement is unlikely to have a significant impact on the European gas market, as it calls for Russia to develop gas fields in eastern Siberia rather than supplying gas from its existing fields. The pipeline to ship the gas into northeastern China has yet to be built, though it has been in the planning stages for years. According to reports, China will spend about $20 billion on domestic infrastructure development under the deal, with Gazprom spending $55 billion. The Chinese portion of the pipeline will be built by China National Petroleum Company, one of the country’s three main state-owned oil and gas firms.
First delivery of gas under the contract is projected to come in 2018.
—Thomas W. Overton is a POWER associate editor (@thomas_overton, @POWERmagazine)