China and the Russia Ukraine Conflict – Update natural gas deal signed

A German proverb says: When two people are fighting, the third one wins. Observers believe this is the case with China as Russia is entangled in a conflict with the West over Ukraine.

The Ukrainian crisis has certainly strained Russia’s relations with the West. Sanctions have been imposed on Moscow, and the US and other European countries are planning to slap more on it. Western countries are also trying to reduce their dependence on Russian gas – at least for the long term.

As a result of the rapidly deteriorating relations between Russia and the West, the governmment in Moscow is moving closer towards Beijing.

Russia is close to signing a decades-long contract to supply natural gas to China at a price that would value the deal at about $400 billion, according to Prime Minister Dmitry Medvedev.

Medvedev’s boss Vladimir Putin arrives in Shanghai today to try and complete an agreement after more than 10 years of talks. The stumbling block has been price, but with Putin facing trade and financial sanctions from the U.S. and European Union after he annexed Crimea from Ukraine, a deal is seen as probable.

The fact is that Russia and China have been negotiating this deal for many years, but there hasn’t been any breakthrough due to Beijing’s objection to the gas price. But it seems that Russia is now willing to make concessions.

Russia is now forced to lower the gas price, estimates the Berlin-based expert.

UPDATE : China and Russia signed the natural gas pipeline deal on the 21st.

Russian news agencies said the contract called for supplies of 38 billion cubic meters of gas a year, which would imply a price of about $350 per thousand cubic meters [about 10% less than Europe], at the low end of what Gazprom currently charges export clients. Gazprom provides 30% of Europe’s gas, around half of which flows through Ukraine. Gazprom needs the higher price it receives for exports to Europe to compensate for the much cheaper price it charges in its domestic market, where gas is subsidized. Last year Gazprom made 2.1 trillion rubles ($60 billion) from the 174 billion cubic meters it sold to Europe, a far higher price than it charges for domestic sales. It made just 794 million rubles from domestic sales of 243 billion cubic meters of gas.

China may make as much as $25 billion in advance payments under the contract to invest in the necessary infrastructure, Russian Energy Minister Alexander Novak told reporters today.

Russia will invest $55 billion in the pipeline and the Siberian fields to feed it, Putin said, while China, responsible for a pipeline on its territory, will spend at least $20 billion, he said.

Russia and China will start talks on a second pipeline to the west of the initial route, Miller said.

Mr. Miller said the price in the China deal “is a commercial secret,” Russian news agencies reported.

According to media reports, China has the potential to become one of the largest importers of Russian gas in the coming years. By the end of the decade, China could cover up to one-third of its gas demand from Russia, allowing Moscow to compensate for any potential gas blockade to Western Europe.

Russia will have to pay to build the pipeline. The previous pipeline to Europe was paid for by the Europeans.

Gazprom plans to build a $22 billion pipeline to China able to carry as much as 38 billion cubic meters (1.34 trillion cubic feet) annually after years of false starts. The company may begin supplying China in 2019 to 2020.

China is expected to pay 10-20% less than what was negotiated with Europe

That amount of gas is almost a quarter of China’s current consumption and about 10 percent of its estimated demand by 2020.

Gazprom’s average price in Europe was $380.5 per thousand cubic meters last year. CLSA forecasts a price for Russia’s gas of $9.50 to $10 per thousand cubic feet ($335 to $350 per thousand cubic meters) delivered to the Chinese border.

That target, worth almost $400 billion over a 30-year contract, compares with the $10 per thousand cubic feet China pays for imports from Turkmenistan and is substantially lower than liquefied natural gas at about $15, Powell said.

If China gets one third of future natural gas from Russia that would be about 2-3% of its overall energy usage in the 2020s.

This would help reduce the amount of energy that China gets from coal.

This will improve the environment and reduce some air pollution.

China needs to develop its own shale gas (they have about 1100 trillion cubic feet of reserves) and get it up to the 20-30 trillion cubic feet per year level in order to use it up for few decades until they have ramped up enough nuclear power.

Previously when China and the USSR were allied (Mao and Stalin) China was the junior partner. This time the roles are reversed.

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