China’s deal with Gazprom – Friends Again?

“After a decade of talks,” in Bloomberg’s words, China and Russia have finally signed the deal for Gazprom’s “Eastern Program” gas, a process of negotiation which began in 2004 when Gazprom and China National Petroleum Corporation(CNPC) signed an initial agreement. However, does this deal really herald the warmest period in Sino-Russian relations since the 1950s? Answering that question will require an echeloned response involving composite questions.

Firstly, what is the content of this gas deal?

The gas deal signed between Russia/Gazprom and China/CNPC is reported to have a total value of $400 billion USD over 30 years (from 2018-2048). The deal stipulates that Gazprom will supply approximately 38 billion cubic metres of natural gas per year over these 30 years. The headline price for the overall value of the contract indicates a price per thousand cubic metres of $350.88 exactly.

The deal also solidifies the levels of investment that Gazprom and CNPC will put into the deal. Gazprom will invest $55 billion into completing the development of the Chayanda and Kovykta gas fields in Eastern Siberia, (See Figure I, Gas production centers 2 & 3) and CNPC will place $20 billion of investment into its own pipeline development.

Figure I: Gazprom’s Eastern Program

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Secondly, what matters in the gas deal and what does not?

That is a much better question. The price of the gas supplied is interesting to note: at a smidge over $350 dollars per thousand cubic meter, that price is at the rock-bottom of Russia’s European pricing. While analysts have stated that, yes, technically Gazprom will be able to make money at that price, and Putin himself stated that the pricing would be linked to the price of oil and oil products, it is probably the case that Gazprom’s margins on this project are razor-thin, and that the Chinese governmentand CNPC “drove a hard bargain” in Putin’s words.

Admittedly, if one takes the opinion that Asia’s forecasted appetite for energy, and especially gas, will continue to increase dramatically, simply getting access to the Chinese market can be seen as a boon for Russia and Gazprom, especially given that 38 billion cubic meters of gas is approximately 23% of China’s 2012 gas consumption, itself a quickly growing 4% of China’s overall energy mix.

Thirdly. what can and should we extrapolate from this deal in terms of overall Sino-Russian relations, given the answers to the first two.

So it’ll probably be profitable for Gazprom, but what does the deal really mean with regards to Sino-Russian relations overall? In Zhou Enlai’s opinion, it’s probably too soon to tell. While much of the Western (and indeed English-speaking Russian) commentary has been focused on how much a possible shift this deal represents in terms of Sino-Russian relations, possibly increasing cooperation on a whole breadth of affairs, it might be important to point out a few basic, overriding facts.

1. The Chinese government is not interested in nor approving of current Russian foreign policy.

China’s position with regards to Russia’s actions over the Ukraine is quite strongly not a supportive one. While Chinese media outlets and commentators do not hesitate to also criticize the U.S. for its perceived role in the crisis, the facts remain that the Chinese have been muted on such actions. The reasoning on this is quite simple. Russia’s actions are carried out to ‘protect ethnic Russians in Crimea and the Ukraine’ – overturning global understandings of the boundaries of the Russian state. China’s international priorities are to preserve global understandings of the boundaries of the Chinese state, (with the possible exception of Taiwan, which China needs no international support in its policies for). The two are, currently at least, diametrically opposed.

2. China consumes a huge amount of energy. Russia is the world’s biggest gas producer and exporter.

The deal makes a lot of economic sense; and surely further Chinese cooperation on energy projects can be expected as a result of this deal, especially given their ability to drive such a hard bargain even with Putin there. But where the Chinese do not have outstanding territorial or political disputes with a country, their general approach to business deals is ‘you stay out of my way and I’ll stay out of yours’ – an approach that has arisen time and time again and which directly applies, given that Russia and China have recently (in 2008) signed agreements resolving longstanding territorial disputes. (The Chinese approach differs in East Asia where it has strong territorial interests, however).

It makes a lot of sense for this deal, which keep in mind, has been negotiated for ten years, to reflect quite strongly business priorities and not political ones. Sure, Putin may have tried to time the signing of the contract to “show” to the West his independence, but 38 billion cubic meters of gas covers about 1/5th of Russia’s exports to Europe, which are estimated at  about 170 billion cubic meters per year. Putin will be hard-pressed to turn Gazprom’s attentions away from Europe anytime soon, even if the Eastern Program eventually supplies 60 billion cubic metres of gas as it is predicted to do eventually.

In short, does China’s deal with Gazprom and Putin mean that China and Russia are on the road to a blossoming friendship? While Putin would like to allege so, it seems unlikely given the current trajectory of economics and international politics in the two countries, which demonstrate a real divergence in interests. It is more likely, rather than friendship developing, that the two sides will stay as colleagues.

 

 

http://www.bloomberg.com/news/2014-05-21/tumbling-gas-prices-signal-europe-is-stuck-with-russia.html

http://news.bbc.co.uk/1/hi/7517380.stm

http://www.bloomberg.com/news/2014-05-21/russia-signs-china-gas-deal-after-decade-of-talks.html

http://www.ft.com/cms/s/0/d9a8b800-e09a-11e3-9534-00144feabdc0.html?siteedition=uk#axzz32LpssDco

http://www.eia.gov/countries/country-data.cfm?fips=ch#ng

http://en.ria.ru/russia/20140521/190004220/Russia-China-Ink-Historic-Gas-Supply-Deal.html

http://www.bbc.co.uk/news/business-27503017

http://www.bbc.co.uk/news/world-asia-china-27076190

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