China and Russia have managed to clinch an 11th-hour deal on the $400 billion-plus long-term gas supply deal on the eve of the final day of President Putin’s visit to China, signalling the closer economic and political relationship between the two countries.
The official communiqué didn’t mention the price tag of the deal, but chief executive of Gazprom Alexey Miller said the total value would be about $400bn. Under the 30-year agreement, the Russian state-owned Gazprom will supply 38bn cubic metres of gas to China National Petroleum Corporation every year starting from 2018. The construction of the pipeline will start as soon as the end of this year.
The Kremlin has been under intense pressure to close the deal as the country faces economic and political isolation in the West over the crisis in Ukraine. Gazprom has been leaking news that a deal was imminent for more than a week.
The negotiation was more than a decade in the making and was finally closed under the watchful eyes of the Chinese and Russian presidents. The press release from China National Petroleum Corporation strongly hinted that it was the collective political wills of Xi Jinping and Vladimir Putin that carried the day.
The biggest disagreement was over the price. Russians wanted to charge Beijing European prices, but the Chinese would only accept the central Asian gas price. Though the exact unit price was not disclosed, rough calculation suggests the price struck between Russia and China was about US$350 per 1000 cubic metres.
That is slightly higher than the export price from Turkmenistan and Uzbekistan to China, which is US$340 per 1000 cubic metres. However, it is a tad lower than the European price that Russia gets for its gas exports. The average export price for Europe was US$352.4 per 1000 cubic metres in 2012 and it was much higher for countries like Germany, France and Italy. Those countries paid between US$415 and US$450 for their gas supply.
In 2013, China imported 53bn cubic metres of gas, which accounted for 31 per cent of total domestic consumption. Beijing sourced more than half of its imported gas -- 28bn cubic metres -- from central Asia.
Most evidence has suggested that the Chinese had the upper hand in the price negotiation. "The Chinese have many alternatives, while Russia has none," said Mikhail Korchemkin, director of energy consultancy East European Gas Analysis, according to Foreign Policy. “Putin needs the contract with China to show the European Union he has a choice.”
Though China increasingly relies on imported gas, it has a diverse source of suppliers, including long-term supply contracts from Australia, Qatar, Malaysia and Indonesia. The shale gas revolution in the United States has turned it from an importer to a potential exporter. There are calls in China for it to sign a deal with the Americans.
What does this deal mean for China’s energy policy? Does it mean China will shift its focus to its more ideologically aligned partner at the expense of other suppliers like Australia?
It is unlikely. Despite the appearance of a fraternal relationship between the two authoritarian countries, mistrust runs deep between China and Russia. Let’s not forget that China was allied with the United States during the 1970s and ‘80s against the former Soviet Russia. Russian nationalists and officials from the thinly populated far-eastern region are not keen on the idea of closer ties with China.
Chinese energy analysts and commentators are openly suspicious of Russia’s track record as a reliable supplier of energy. For example, Chen Weidong, the chief energy analyst at China National Offshore Oil Corp, one of the big three state-owned energy giants, publicly questioned Russia’s erratic behaviour as a supplier.
He said Russia behaved like a scoundrel without compassion during the cold winter of 2006 when it switched off its gas supply to Ukraine. “It is most effective for Russia to flick the switch at the time and it works wonderfully if you are a debt collector,” he said in an opinion piece on Caixin. “However, no one likes a rogue who takes advantage of people at the hour of their need.”
Chen warns against people who want to attach more geopolitical meaning to this deal, saying business should stay as business. He reminds people of how Russia suddenly stopped the supply of oil via a railway to China a few years ago.
“The global energy supply landscape is getting increasingly diversified. China will be fine without Russian gas,” he said. Australia’s biggest enemy is not cheaper Russian gas, but the high cost of production and infrastructure bottlenecks. We need to get our own house in order to take advantage of China’s future demand for LNG.