Gas agreement seen firming China-Russia energy ties
A Nov. 9 framework agreement for another large gas-supply deal between OAO Gazprom and China National Petroleum Corp. remains far from concluded but “reinforces the notion of a growing relationship between energy-hungry China and energy-export-dependent Russia,” according to analysts at the Center for Strategic & International Studies (CSIS), Washington, DC.
Unlike the Gazprom-CNPC agreement signed in May, the new memorandum of understanding is based on the long-planned and geopolitically significant “western route,” noted Jane Nakano and Edward C. Chow, both senior fellows with the CSIS Energy and National Security Program, in a Nov. 24 report (OGJ Online, Nov. 11, 2014). Signing of the MOU followed a meeting between Presidents Vladimir Putin of Russia and Xi Jinping of China during a summit of Asia-Pacific Economic Cooperation leaders in Beijing.
The western route is based on a 2,600-km pipeline that would carry gas from a compressor station south of Novy Urengoi in the Yamal-Nenets Autonomous Okrug along an existing pipeline corridor and across Russia’s Republic of Altai to the Chinese border.
Under the new MOU, Gazprom would supply 30 billion cu m/year of West Siberian gas to northwest China for 30 years, starting in 2019. The earlier agreement, still under negotiation, is for 38 billion cu m/year of East Siberian gas for 30 years starting after 2018 (OGJ Online, May 21, 2014).
Geopolitical pressures
Nakano and Chow wrote that geopolitical pressures “likely played some role” in pushing Gazprom to enter the agreements.
In the May deal, they said, “The tension with Europe over Ukraine appears to have encouraged the Russians to soften their insistence on using oil-linked sales contracts in Europe as a benchmark price for the pipeline gas deal with China, which had proposed a lower price comparable to its pipeline gas imports from Turkmenistan, below $10/MMbtu.”
The new MOU, the analysts wrote, is a further “sign of the Russian economy under duress, a desire to deepen market ties east, and a gesture toward western countries seeking to constrain Russia through economic means.”
There has been no indication that the parties seriously discussed price before signing the MOU, according to Nakano and Chow, who pointed out incorporation of the western route overcomes 10 years of Chinese objection. Altai pipeline gas would enter China at a point far from Chinese consumers and from the same direction as existing deliveries from Central Asia.
“It may be just as difficult this time around for Russia to find the right combination of factors to get the Chines to agree,” the analysts warned.
Deliveries under the two agreements, if they’re completed, would make China the largest single customer for Russian gas and could be expanded to a combined 160 billion cu m/year.
They would “put this new market in direct competition with European markets for supplies from West Siberia, whose supergiant fields have been the main source of Russian gas supplies to Europe,” noted Nakano and Chow.
Europe has absorbed about 80% of Russian oil and gas exports, including 160 billion cu m of gas in 2013. With European demand stagnant, Russia has sought new markets in Asia while European countries have tried to secure supplies from outside Russia.
