Sino-Russian natural gas deal transforms global energy markets

Russia China energy pact

Sino-Russian energy deal will have profound economic consequences for global energy markets and will have an impact on relations between Russia and the West.

On 21 May, Russia and China signed a decade-long negotiated deal on Russian natural gas exports to China valued at $400 billion. According to the agreement, Russia’s gas giant Gazprom will annually export 38 billion cubic meters (bcm) over a 30 year period. Although neither side revealed the details related to prices and conditions, based on the available information the price is likely to be $350 per thousand cubic meters, or $9.8 per million British termal units (mmbtu), which is Gazprom’s average price for international buyers. The first deliveries will not start before 2019, and the full capacity of 38 bcm should be reached by 2024.

For Russian president Vladimir Putin, this long-awaited deal represents more than merely a business contract. In the face of the escalating conflict with the West over the situation in Ukraine, the arrangement with the Chinese National Petroleum Corporation (CNPC) is primarily a political victory. It not only shows that China is a strong political ally, but also that Russia has an alternative to its energy export dependency on Europe.

From the Russian perspective, regardless of the Ukrainian situation, the deal is a result of both Gazprom’s efforts to find new markets in the increasingly difficult business environment in Europe caused by increased competition and strict anti-monopolistic requirements of the Third Energy Package, and the need to unlock its enormous potentials in the Far East.

However, Ukraine was without a doubt an important catalyst, and the circumstances surrounding the eleventh hour deal signify that the Russian side was under pressure to strike a deal during president Putin’s visit to China. But politics aside, the arrangement was primarily economically driven, as the successful export deal with China is a key prerequisite for Russian long-term energy expansion in Asia. According to a recent study, the package will financially boost Gazprom’s plans to build the Power of Siberia pipeline and develop Vladivostok LNG project (VLNG) which, along with the existing Sakhalin and Yamal LNG plants could bring up to 95 bcm of gas to the Asian markets by 2025. In comparison, Gazprom’s gas exports to Europe reached 162 bcm in 2013.

China will also greatly benefit from the deal, both in terms of supply security and price. Since its natural gas consumption is expected to double by 2017 to 330 bcm, Russian gas will allow China to additionally diversify it supply sources at affordable price, which is comparable to the prices of imports from Central Asia. On the other hand, China will be careful enough to leave room for other supply routes and therefore reduce the potential for the European-style dependency on Russian gas.

The deal will have an important impact on global natural gas markets. If Gazprom manages to develop its Asian strategy fully, it will become the key player in Asian energy markets. It will be able to compete with existing and prospective LNG suppliers from the Middle East, East Africa, Australia and North America.

In terms of geopolitics, the deal will not only boost Russia’s revenues but also give extra leverage to Russian foreign policy, in particular in its relations with the West. Gazprom’s CEO Alexey Miller has already announced that the expansion to Asian markets will have an impact on European gas prices, which is presumably related to the worsening relations over Ukraine and Europe’s proclaimed goal to rapidly reduce its dependency on Russian gas.

However, the deal should not be overestimated, both regarding future Sino-Russian alliance and the Russian energy shift from Europe to Asia. The relations between the two countries will remain largely pragmatic, despite Russian efforts to portray the transaction as a sign of closer relations with its eastern neighbour, and restricted primarily on cooperation over issues of common interest.

The EU will remain a key market for Russia’s gas for years to come since neither Europe nor Russia can deleverage their mutual economic interdependency in the short term. Nonetheless, in the long term, the deal might be a powerful force that will accelerate Russia’s pivot towards Asia, with consequences not only for energy markets, but also for the global economy.

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Categories: International, Natural resources

Author:Dr. Ante Batovic

Ante is a foreign policy and energy analyst. Previously he was a lecturer in International History at the University of Zadar where he specialised in Cold War and East European history. He was a visiting fellow at the LSE IDEAS centre and the fellow of the Robert Schuman Foundation in the European Parliament. He holds a Masters degree in Global Politics from the London School of Economics and a PhD in History from the University of Zadar. He is an experienced researcher interested in foreign policy, political economy and energy.

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