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Pipeline Politics
China Scores Cheap Gas from Russia

Russia and China have signed a framework agreement for another massive new gas deal, coming just months after the two sides inked an landmark deal worth $400 billion. Adding to the 38 billion cubic meters (bcm) of gas sold in the earlier deal, the new deal adds an additional 30 bcm, destined to the western part of China. The WSJ reports that, as with the previous deal, China appears to be getting the better part of the new deal as well:

“Given weaker oil prices and rubles, we believe China can extract even better terms on this second deal versus the first deal struck in May,” Gordon Kwan, head of commodity research at Nomura Holdings , said. Mr. Kwan estimated the value of the second deal for the supply of 30 billion cubic meters a year at $284 billion. […]

“The two Siberian gas deals altogether could account for almost 17% of China’s total gas consumption by 2020,” Mr. Kwan said.

Beijing is clearly taking advantage Moscow’s desire to find new buyers for one of its most important exports. This hasn’t been a great year for Russian-European relations, to say the least, and while Kiev eked out a last-minute, short-term deal to cover its gas needs this winter, the fact remains that the situation in Ukraine has encouraged European leaders to reduce their dependence on Russian gas supplies. To shore up his country’s energy security, Putin has been forced to find new buyers.

China knows all of this, of course, and is using it to cheaply shore up its own energy security. Beijing is also getting substantial supplies of a relatively clean burning fossil fuel that could go a long way towards squeezing out coal and cleaning up the country’s dire air pollution problem. It’s also noteworthy that this Russian gas will be transported by pipeline over land, which is a boost to Chinese energy security in its own way, as those supplies will be less dependent on maritime routes patrolled by American ships.

The western pipeline’s route hasn’t been confirmed yet, though it tentatively looks like it will pass through the restive Xinjiang province. Other routes through Mongolia and Kazakhstan have also been mooted, though China has expressed reservations over the former option and Kazakhstan over the latter.

There are plenty of details left to hash out here and a considerable amount of time and capital investment before Russia’s gas starts flowing eastward. We’ll be watching.

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  • Anthony

    Russia has resources (gas) that China needs and China has capital ( excess savings) that Russia needs. Hmmmm…a happy geopolitical couple…

  • Jacksonian_Libertarian

    There is no honor among thieves, the question that needs to be asked is: “How come Russia hasn’t been the major supplier of gas to China all along, as it has been to Europe?”. They have shared borders all along, and Russia’s gas production is closer to China than to Europe, so why the failure to sell gas to China all along?

  • Josephbleau

    China needs a fast answer to keep the air somewhat breathable for the elite urbanites who can cause trouble for the party. the poor will still burn arsenic contaminated coal or dung. China is like the mule between two haystacks- should it steal oily islands from the Philippines or steal golden gassy Siberia. This is a short to medium term solution pending resolution of that outcome.

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