China, Russia sign $400 billion gas deal
EPA/Alexey Druginyn / Ria Novosti / Kremlin Pool - Russian President Vladimir Putin (L) and Chinese President Xi Jinping (R) attend a ceremony of signing joint Russia-Chinese documents in Shanghai, China, May 21, 2014.
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BEIJING — China signed a long-awaited deal for Russian natural gas Wednesday, giving China a new energy source and Russia a diplomatic boost in the face of sanctions and condemnation for its aggressive actions in Ukraine.
Announced after meetings between Chinese President Xi Jinping and Russian President Vladimir Putin at an Asia security conference, the 30-year deal is worth an estimated $400 billion, according to comments in Russian media by Gazprom chief executive Alexei Miller.
On a symbolic level, the deal also provided China and Russia a chance to reaffirm theirstrategic alliance against the United States, their shared global rival.
U.S. Treasury Secretary Jack Lew appealed to China to avoid action that might hurt recent Western sanctions against Russia. But China’s booming economy has brought with it a ravenously growing need for energy, especially clean alternatives given its current pollution struggles and reliance on coal.
The agreement allows Russia to diversify its gas exports just as Europe is trying to reduce its consumption of Russian gas in response to the country’s role in the Ukrainian crisis.
“This is Gazprom’s biggest contract. We don’t have a contract like this with any other company,” Miller said at the meeting in Shanghai, according to Russia’s Interfax news agency.
In the stroke of a pen, the agreement significantly shifted in Russia’s economic relations with its neighbors, creating a new major export market to the east and reducing reliance on European partners at a time when relations are close to an all-time low. Putin called it a “watershed event.”
He said that the implementation of the deal would start “tomorrow.”
The final price for gas negotiated in the deal was not announced, and it was unclear, given the vague nature of the announcement, whether there were other aspects to the accord that remain to be worked out.
Analysts at IHS Energy — who have tracked the progress of the deal, almost 10 years in the making — said in a written analysis that they believe the final agreed price was “closer to what Russia wanted than what China was initially prepared to pay.”
The long-anticipated agreement met with approval and pride from many Russians, in an atmosphere of rising nationalism and anti-Western rhetoric over the crisis in Ukraine.
One caller to the Ekho Moskvy radio station declared the gas deal “another victory for Putin because he managed to sell gas for European prices,” while another listener suggested the new level in Russian-Chinese cooperation must be a “nightmare for America.”
Putin told journalists in Shanghai on Wednesday that the price of the deal was “pegged to the price of oil and petroleum products,” the Interfax news agency reported.
“This is the largest contract in the history of the gas industry of the former USSR and the Russian Federation,” he told reporters in Shanghai. The infrastructure costs to develop the natural gas fields needed to supply China will top those of putting on the Sochi Olympics – itself an epochal event in Russian state spending.
That the price of the natural gas will be tied to oil prices is also a win for Russia, analysts said, since oil prices are expected to remain high and European customers have been fighting for several years to allow natural gas prices to float freely based on market demands. Gazprom charged European customers on average about $380 per 1,000 cubic meters in 2013.
But the actual price tag on the 30-year contract remained a mystery hours after the signing on Wednesday, raising suspicion for some of the Kremlin’s skeptics that it had dropped the price significantly for China in a desperate maneuver to shore up a steady cash flow for Russian energy giant Gazprom, amid sinking revenue and Western sanctions.
Miller, the Gazprom CEO, had earlier called the price a “commercial secret.” And Putin, without naming an amount, told journalists in Shanghai on Wednesday that the price was “pegged to the price of oil and petroleum products,” the Interfax news agency reported.
Mikhail Krutikhin, an energy and oil analyst at Rusenergy, a Moscow think tank, said the reason for the secrecy was obvious: “There’s something fishy in the contract,” he said, suggesting that Russia got a bad bargain.
Unnamed individuals quoted in Russian media approximated the price at $350 per 1,000 cubic meters of gas, based on earlier projections of a long-term price tag of $400 billion.
But if the actual sale was much less than that, the deal is not as profitable as the Kremlin is making it out to be, Krutikhin said. Gazprom is already losing out to American and European competition; Europe’s gas demands have been stagnant; and the threat of mounting Western sanctions over Ukraine are “making Mr. Putin jittery,” he added.
Russian officials on Wednesday also hinted at a possible “prepayment” totaling $25 billion, raising further questions of whether a prepayment would amount to emergency assistance.
The construction of the pipelines and other infrastructure alone are expected to top $70 billion, Krutikhin said — an amount that a beleaguered Gazprom can’t afford on its own. Russia expects China to pick up part of the bill.
Hauslohner reported from Moscow. Michael Birnbaum also contributed to this story from Kiev.
