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China and Russia Reach 30-Year Gas Deal China and Russia Reach 30-Year Gas Deal
(about 11 hours later)
BEIJING — China and Russia agreed to a major 30-year natural gas deal on Wednesday that would send gas from Siberia by pipeline to China, according to the China National Petroleum Corporation. BEIJING — China and Russia signed a $400 billion gas deal on Wednesday, giving Moscow a megamarket for its leading export and linking two major powers that, despite a rocky history of alliances and rivalries, have drawn closer to counter the clout of the United States and Europe.
The announcement caps a decade-long negotiation and helps bring Russia and China closer than they have been in many years. The contract was driven to a conclusion by the presence of President Xi Jinping of China and President Vladimir V. Putin of Russia in Shanghai for the last two days. The impetus to complete the gas deal, which has been talked about as a game-changing accord for more than a decade, finally came together after the Ukrainian crisis forced Russia’s president, Vladimir V. Putin, to urgently seek an alternative to Europe, Moscow’s main energy market. Europe has slapped sanctions on Russia and sought ways to reduce its dependence on Russian energy.
The notice posted on China National Petroleum’s website said that beginning in 2018, Russia would supply 38 billion cubic meters of natural gas each year to China. China will build the pipeline within its own borders, while Russia will be responsible for the development of the fields and pipeline construction in its territory, the notice said. Mr. Putin, on a two-day visit to Shanghai, and the Chinese leader, Xi Jinping, oversaw the signing of the contract between Gazprom and the China National Petroleum Corporation, the biggest natural gas deal Russia has sealed since the collapse of the Soviet Union. The contract runs for 30 years and calls for the construction of pipelines and other infrastructure that will require tens of billions of dollars in investment.
The notice said the Irkutsk Kovyktinskoye and Chayandinskoye gas fields in Russia would primarily supply the gas. The deal, which Mr. Putin called an “epochal event,” solidified a relationship between China and Russia that had been warming since Mr. Xi assumed power in 2012, as Mr. Xi and Mr. Putin have found common cause.
The notice did not mention price, but experts said hard bargaining by China for a lower price than European countries were paying for Russian natural gas was at the core of the negotiations. “The Sino-Soviet rift that brought the two countries to the brink of nuclear war in the ’60s has been healed rather dramatically,” said Strobe Talbott, president of the Brookings Institution and the chairman of Secretary of State John Kerry’s Foreign Policy Advisory Board.
The deal is expected to be worth about $400 billion, said James Henderson, a senior analyst at the Oxford Institute for Energy Studies. Ostensibly on the same side during the Cold War, the Asian neighbors even then competed for global influence with their divergent brands of communism. They fought a brief but explosive border war in 1969, and later took opposite sides in conflicts in Vietnam and Afghanistan.
The document was signed in the presence of Mr. Putin and Mr. Xi, the Russian news agency Itar-Tass reported. They have similar views of the United States, however, including opposition to its unilateral military actions in Kosovo, Iraq and Libya, and wanted to “take Uncle Sam down a peg or two,” Mr. Talbott said. Mr. Putin, in particular, wanted to make a point of showing that the United States and its NATO partners were in decline.
Mr. Putin told reporters after the signing ceremony that the price of the gas for China was based on the market price of oil, just as it was for European countries. The deal offered a lift for the Russian economy, he said, and for Mr. Putin, China’s validation would improve Russia’s world image.
“The gas price formula as in our other contracts is pegged to the market price of oil and oil products,” Itar-Tass quoted Mr. Putin as saying. At the same time, Mr. Xi was unhappy with the Obama administration on issues ranging from Washington’s outspoken support of its military alliance with Japan, its criticism of China’s actions in the South China Sea, and its hard line on cybertheft, said Shi Yinhong, a professor of international relations at Renmin University in Beijing.
The deal is the largest ever for the Russian natural gas industry, he said. Although China had expressed neutrality over the Ukraine crisis, the strained relations with Washington in other spheres tipped that position in favor of Russia, Mr. Shi said. Mr. Xi and Mr. Putin have met seven times, he noted.
Russia will invest $55 billion in infrastructure for transporting the gas to China, said Alexei B. Miller, the chief executive officer of Gazprom. Those factors appear to have pushed the two sides to an agreement, whose final sticking point had been price. The final price of the Russian gas, which will flow through a 2,500-mile pipeline from two fields in Siberia, was not disclosed, and energy markets were trying to parse who gained the bigger advantage.
Mr. Putin has been eager to diversify Russia’s gas sales to Asia and away from stagnant European markets. At the same time, he is eager to demonstrate that Russia, in the face of sanctions over the annexation of Crimea, is not dependent on the West. Russia had been holding out for a price close to what European countries pay, and China for a price akin to the cheaper gas it buys from Central Asia, energy experts who tracked the talks said.
And Mr. Xi, who has met Mr. Putin seven times since assuming power, was willing to help the Russian leader, said Shi Yinhong, a professor of international relations at Renmin University in Beijing. With Russia’s economy near recession and the International Monetary Fund projecting 0.2 percent growth this year, Mr. Putin was desperate to get the deal done, energy experts said.
Expectations that the deal would be sealed when Mr. Xi and Mr. Putin met on Tuesday were dashed when negotiators from China National Petroleum and Gazprom failed to reach an agreement. The chief executive of Gazprom, Alexey Miller, said the contract called for Russia to supply 38 billion cubic meters of gas annually over 30 years, making the price about $350 per thousand cubic meters. In 2013, the average price of Gazprom’s gas in Europe was about $380 per thousand cubic meters.
Political considerations, including Mr. Putin’s coming visit to Europe in early June — when he will meet with President Obama and the German chancellor, Angela Merkel — were probably a vital impetus to getting the contract over the finish line, energy experts said. “The pricing appears to be between European Union prices and Turkmenistan prices,” said Joerg Wuttke, the president of the European Union Chamber of Commerce in China. “We will have to wait for the next few months to learn about the details.”
Mr. Xi and Mr. Putin met on the sidelines of a conference of Asian nations. During his address to the gathering, Mr. Xi proposed a new Asian structure for security cooperation based on a regional group that would include Russia and Iran, but exclude the United States. Morena Skalamera, a fellow at the Geopolitics of Energy Project at Harvard, said Mr. Putin was more willing to concede on price than he had been before the Ukraine crisis.
The proposal is another indication that Russia and China, though wary of each other, are interested in working together outside the confines of global and regional institutions dominated by the United States. “If the European market was a question mark before the Ukrainian crisis, now with sanctions, Putin needed China even more,” she said.
The final price of the gas stipulated in the document remains a “commercial secret,” Mr. Miller, the chief executive of Gazprom, told the Russian channel TV-Novosti. “Politically, it is important for Putin to show that the ‘Greater Russia’ is back on the international scene and that it has other, non-Western options to restore its rightful place.”
A central issue in the negotiations was how to bridge the difference between the premium prices Russia charges European countries and the lower prices that China pays for natural gas from Central Asia, primarily Turkmenistan, said Kenneth S. Courtis, a founding partner of Thames Investment, who was in Shanghai on Tuesday. In exchange for a lower price, China offered a loan of about $50 billion that will finance development of the gas fields and the construction of the pipeline by Russia up to the Chinese border, Ms. Skalamera said. The Chinese would build the remaining pipeline, and gas is scheduled to start pumping in 2018, she said.
The price of Russian gas to Europe is based on fluctuations in oil prices, making it more expensive than gas that China buys from Central Asia, Mr. Courtis said. In remarks after the signing, Mr. Putin stressed that the price of the gas was based on the market price for oil, just as it was for Russia’s gas supplies to European countries. “The gas price formula, as in our other contracts, is pegged to the market of oil and oil products,” Itar-Tass quoted him as saying.
Gazprom had indicated that it was not going to bend on the principle of a gas price based on oil prices in the China deal, analysts said. But how to structure that price relationship had appeared to be a major stumbling block. Without the oil price benchmark, Russia would be under pressure to renegotiate European prices, said Kenneth S. Courtis, a founding partner of Thames Investment. The price of Russian gas to Europe is based on fluctuations in oil prices, making it more expensive than gas that China buys from Central Asia, he said.
China National Petroleum asked for equity stakes in the two Gazprom gas fields, much as China had negotiated successfully with other Russian energy companies, Mr. Henderson said. It was not clear whether it succeeded this time. Even under the new agreement, Europe will remain Russia’s biggest market.
The geopolitical situation definitely helped smooth the negotiations, said Keun-Wook Paik, associate fellow in energy, environment and resources at Chatham House, a policy institute based in London. Mr. Putin needed to find “an umbrella to show that he’s not completely isolated,” Mr. Paik said. The production of American shale gas also gave Russia incentive to rapidly complete the deal with China and to seek other markets in Asia, Ms. Skalamera said. “The rapid rise of U.S. natural gas is giving Europeans genuine market options,” she said. “Many are opting out of the grip of Gazprom. The result? Russia is looking for a new cash cow, turning its gaze east.”
China was under no such pressure, having lined up substantial and cheaper flows of gas from Central Asia. Siberian natural gas does give China a cleaner substitute for the fossil fuels — coal and petroleum — that provide most of its energy needs, and cause much of the pollution smothering China’s cities.