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China, Russia sign $400 billion gas deal China, Russia sign $400 billion natural gas deal
(about 11 hours later)
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. BEIJING — China signed a huge, long-awaited deal on Wednesday to buy Russian natural gas, giving Beijing a new source of clean energy and Moscow a diplomatic boost as it faces international sanctions 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. With the stroke of a pen, Russia significantly shifted its economic relations with its neighbors, creating a major new export market to the east and reducing its reliance on European customers at a time when its relations with the West are at their lowest point since the Cold War.
On a symbolic level, the deal also provided China and Russia a chance to reaffirm their strategic alliance against the United States, their shared global rival. Russian President Vladimir Putin called the deal a “watershed event” and said implementation would start “tomorrow.”
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 30-year deal was announced after meetings in Shanghai between Putin and Chinese President Xi Jinping. It is worth an estimated $400 billion, Alexei Miller, chief executive of the Russian energy giant Gazprom, told Russian media.
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. The deal marked a new partnership between two countries that have at times mistrusted each other but have also sought to counter U.S. influence in global affairs.
“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. China’s booming economy has created a growing need for energy, especially cleaner sources of power, given its reliance on coal, which has produced major pollution problems.
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.” The agreement allows Russia to diversify its gas exports at a time when the crisis in Ukraine has accelerated calls in Europe to rely less on energy supplies from Russia. Europe gets about 30 percent of its gas from Russia.
He said that the implementation of the deal would start “tomorrow.” U.S. Treasury Secretary Jack Lew appealed to China in a visit last week to avoid actions that might limit the impact of recent Western sanctions against Russia. But a U.S. official, who was not authorized to speak by name, said the United States would distinguish between deals that have long been in the works — such as this one — and new agreements that seek to fill space left by U.S. and European Union sanctions.
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. The deal will involve developing natural gas fields in Russia and building pipelines from Russia to China. The cost of building the infrastructure alone is expected to top $70 billion, said Mikhail Krutikhin, an energy and oil analyst at RusEnergy, a Moscow think tank.
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 agreement was 10 years in the making, and price had long been the stumbling block. On Wednesday, the final per-unit price of the gas remained a mystery.
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. The $400 billion figure quoted by Gazprom’s Miller is probably the result of a formula that could include other costs — such as construction, transportation of the gas and other fees — making it difficult to work backward to the price per unit.
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.” Miller called the price a “commercial secret.”
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. Analysts at IHS Energy — who have tracked the deal’s progress — said in a written analysis that they believe the final price was “closer to what Russia wanted than what China was initially prepared to pay.”
“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. “This is Gazprom’s biggest contract. We don’t have a contract like this with any other company,” said Miller in Shanghai, according to Russia’s Interfax news agency.
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. The agreement met with approval from many people in Russia, which has been swept by rising nationalism and anti-Western rhetoric related to the crisis in Ukraine.
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. 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 of Russian-Chinese cooperation must be a “nightmare for America.”
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. Suspicions about price
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. Putin said that the gas prices in the deal were pegged to the price of oil and petroleum products. That represents a win for Russia, analysts said, since oil prices are expected to remain high. European customers have been fighting for years to have natural gas prices float, based on market demand
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. “This is the largest contract in the history of the gas industry of the former USSR and the Russian Federation,” Putin told reporters in Shanghai. The infrastructure costs to develop the natural gas fields needed to supply China will top those of the Sochi Games — which are believed to have been in the tens of billions of dollars, officials said.
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. But the missing price details raised the suspicions of some Russians, who suspect Putin dropped the price of gas significantly for China in a desperate maneuver to ensure a steady cash flow for Gazprom in the face of sinking revenue and Western sanctions.
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. “There’s something fishy in the contract,” said Krutikhin, the think-tank analyst, suggesting that Russia got a bad bargain.
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. Erica S. Downs, a China energy expert at the Washington-based Brookings Institution, cited other possible reasons for the secrecy. “Too high a price could anger China’s current suppliers in Central Asia,” she said. “Too low a price could affect Russia’s European buyers. And there’s the optics of the deal. If nobody knows the price, then no one can say who came out better or worse.”
Hauslohner reported from Moscow. Michael Birnbaum also contributed to this story from Kiev. Gazprom charged European customers on average about $380 per 1,000 cubic meters in 2013. Unnamed individuals quoted in Russian media estimated the price in the China deal 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 figure 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; gas demand in Europe has been stagnant; and the threat of mounting Western sanctions over Ukraine is “making Mr. Putin jittery,” he added.
Russian officials on Wednesday also hinted at a possible “prepayment” totaling $25 billion.
An online notice posted on China National Petroleum’s Web site said that under the deal, Russia would begin supplying China with 38 billion cubic meters of natural gas a year beginning in 2018.
Russia will be responsible for building processing plants, doing field development and constructing pipelines on its side, and China will be responsible for the pipeline construction within its own borders.
Hauslohner reported from Moscow. Michael Birnbaum in Kiev and Xu Yangjingjing in Beijing also contributed to this report.