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Dragons and Pipelines and Bears Oh My
China and Russia Sign Massive New Gas Deal

Well, this is big. Today in Beijing, Russian President Vladimir Putin and Chinese President Xi Jinping inked a major natural gas deal that was more than ten years in the making, finally settling on a price for the gas just hours before Putin jetted off back to Russia. The contract is worth $400 billion in total over the 30-year period, during which Gazprom will supply 38 billion cubic feet of gas per year.

The details are still hazy at this point, including the most important fact of all: the price at which Russia is selling its eastern neighbor the vast supply of natural gas. Sources close to the deal seem to think the lowest the Russians would go would be around $350 per thousand cubic feet of gas, which is on the low end of the $350-$380 price range paid by their European customers.

But if that’s the lowest the Russians would go, it was likely the agreed-upon price; China was holding most of the leverage in this discussion, if only because Putin needed this more than Xi did. Negotiations reportedly went on until four in the morning, and Putin admitted that “our Chinese friends are difficult, hard negotiators.” Beijing is obviously happy to have a new source of natural gas to displace some of the dirtier coal it burns, which will help clear its smoggy skies. But Moscow has to be relieved to have a big new customer, ever since the increasingly restive Europeans start looking for new sources of gas after Russia’s aggression in Crimea. It’s likely no coincidence that this deal, more than a decade in the making, was finally signed just months after the crisis in Ukraine began.

Also unclear is exactly who will be footing the bill for the pipeline connecting the two countries. Putin intimated that China will put up $20 billion for the requisite infrastructure development, but further details remain forthcoming. The extent to which Russia will fund this new connection should shed some light on just how desperate Vlad was for this deal.

In the midst of all this uncertainty, Russian leaders seem to agree on the import of the new contract. “This is Gazprom’s biggest contract. We don’t have a contract like this with any other company,” the company’s CEO Alexei Miller told reporters. “This is the biggest contract in the history of the gas sector of the former USSR,” added Putin.

There’s another aspect of the deal that will be interesting to follow: The new pipeline will connect Russia’s gas reserves with its eastern coast, potentially giving it access to Asia’s very hungry LNG market. Reuters reports:

[T]he deal opens up an opportunity for Gazprom to become a bigger player in the booming Asian LNG market, a sector it has so far not been involved in on a major scale.

Gazprom is planning to build a new LNG plant on the Russian Pacific coast near Vladivostok, but so far lacks the infrastructure to supply the facility with the amounts of gas necessary to meet demand in the region.

We’ll find out more about the nitty-gritty of the deal in the coming days, but for now, this can be seen as yet another win for Putin, who is having a real humdinger of a year so far.

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  • S.C. Schwarz

    We could be in the LNG market too, if only Obama would approve some of those proposed LNG terminals. Of course, because of AGW, the terminals can’t be approved.

    I guess Russian gas doesn’t generate CO2?

  • PKCasimir

    Oh come off it. Do some analysis before you go trumpeting this rather minor deal as something apocalyptic.The Chinese took advantage of a weakened Russia to get some natural gas supplies at very cheap prices. Russia will be exporting some 38 billion cubic meters of natural gas per year to China; Russia now exports some 175 billion cubic meters of gas to Europe alone at much higher prices. As Europe weans itself off of Russian natural gas, the Russians are forced to sell natural gas at lower prices to China. Russia heavily subsidizes its domestic natural gas market and desperately needs to find offsetting revenue from the higher prices it gets from Europe.
    In addition, there currently is no pipeline which could bring natural gas down from Siberia to Russia. There is the problem of just who is going to build it and where the financing will come from. Russia is cut off from Western capital and can’t afford to build it on its own. Capital has fled from Russia because of sanctions.
    So let’s just all take a deep breath here.

  • Thirdsyphon

    I think you’re burying the lede here. The big story is that China has taken a major step towards removing the toxic cloud of pollution that’s afflicting its cities, and more than a billion people can look forward to living longer, healthier lives as a result.

  • El Gringo

    The Russians may not be as happy about the deal when they discover that they can’t jerk the Chinese around like they can the Europeans when they have a diplomatic spat.

  • Displaced_Canuck

    Your units are wrong in this article. Either you mean cubic meters not feet or trillion not billion.Prices in North America are ~$3.50 per thousand cubic foot (mcf) and in the internatioal market LNG prices are below $10 per mcf.

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