Russia Turning East for a New Gas Customer

After spending more than a decade negotiating, China and Russia may be ready finally to ink a natural gas deal as soon as next month. Back in 2006, Gazprom signed a Memorandum of Understanding to transport gas by pipeline to energy-hungry China, but disputes over price have prevented the discussion from advancing much further. Talks were re-energized last year, as Xi Jinping made Moscow his first foreign visit to discuss, among other things, energy deals between the two countries. In October, Russian oil company Rosneft agreed to send China 200,000 barrels of oil per day, and an independent Russian gas company pledged to ship liquified natural gas east as well. Still, price disputes have precluded the crown jewel of the two countries’ potential energy future—a gas pipeline deal.

But, as Reuters reports, at least one senior Russian official is confident that the long sought-after deal is finally at hand:

As talks between state-controlled Gazprom and Chinese officials continued in China, Arkady Dvorkovich, a deputy prime minister, said the sides were close to sealing a deal that would also involve construction of a pipeline to carry 38 billion cubic metres (bcm) of gas a year.

“Regarding Gazprom’s gas contract, the sides are close to agreement … The only issue remaining is … the price,” he was quoted as saying by Itar-Tass news agency. “We really hope that the contract will be signed in May.”

What has changed? Russia’s relationship with its European customers is under tremendous strain following Moscow’s invasion and occupation of Crimea. Russia’s ability to turn off its gas supply has lurked in the background of this recent conflict; Europe, now confronted with an increasingly belligerent eastern neighbor, is agitating for alternatives to Russian gas, such as American LNG or its own domestic sources of shale gas. Meanwhile, Russia is more urgently exploring alternatives of its own, and finding a new customer in China makes plenty of sense.

For its part, China wants another steady supply of natural gas, especially one that comes over land, which doesn’t have to go through the costly process of liquefaction. China has a massive air pollution problem, and natural gas could displace some of the much dirtier coal that has produced such burdensome pollution in its megacities.

The deal itself would be huge for both countries. The 1.3 trillion cubic feet of gas the proposed pipeline would transport every year would have made up a roughly a quarter of gas China consumed in 2012, and would have accounted for more than 5 percent of the dry natural gas Russia produced that year (the latest year such statistics are available).

Still, the vagaries of Sino-Russian negotiations over gas bring to mind the adage “once bitten, twice shy.” Russia has a greater need now than ever before to find a new gas customer, but China could use this to its advantage and play hardball on price. Whatever happens, it’s becoming increasingly clear that Russia is spearheading a loose-knit, de facto coalition of revisionist powers. Earlier this week it threatened to bust U.S.-led sanctions against Iran; a gas deal with China would be more of the same. We’ll be watching closely.

Andrew Allison

“Back in 2006, Gazprom signed a Memorandum of Understanding to transport gas by pipeline to energy-hungry China, but disputes over price have prevented the discussion from advancing much further”

“The only issue remaining is … the price, . . .”

Hello?
El Gringo

“For its part, China wants another steady supply of natural gas”

And so it turns to Russia, a country that has proven more than willing to shut off said gas flows for political leverage?
http://winterings.net/ Alex K.

Yes, the only issue remaining is the price, but it’s the pivotal issue. I would imagine that Russia’s Crimean adventure has boosted China’s bargaining power on this.

Actually, there are some other issues in the background, such as who is going to build the pipeline and at what cost. China might suggest, “We build the pipeline but you give us a price discount.”

Russia’s self-described patriots have whined for ages about the country being a “resource appendage” of the West. Being the same for China is OK with them apparently.
gabrielsyme

Earlier this week it threatened to bust U.S.-led sanctions against Iran; a gas deal with China would be more of the same.

Uh, no. A gas deal would be a normal and untroubling international business deal. It might be argued that we ought to have sanctions against China, whose human rights record is much, much worse than Russia’s, but we and the entirety of the West are eager to trade with them.