5 things about the China-Russia gas deal

Russian President Vladimir Putin (L) and Chinese President Xi Jinping (R) attend a ceremony of the signing of a China-Russia gas deal in Shanghai, China, on 21 May 2014. -- PHOTO: EPA
Russian President Vladimir Putin (L) and Chinese President Xi Jinping (R) attend a ceremony of the signing of a China-Russia gas deal in Shanghai, China, on 21 May 2014. -- PHOTO: EPA

China and Russia signed a multi-billion dollar gas deal on Wednesday. Here are five things about the deal.

Russia-China gas pipeline
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A long-awaited deal

The deal between Russia's Gazprom and China National Petroleum Corp (CNPC), signed at a summit in Shanghai, has been 10 years in the making.

Under the agreement, Gazprom will supply 38 billion cubic meters of natural gas to China each year, for 30 years, with the possibility of increasing shipments to 60 billion cubic metres per year, starting from 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.

A mega but secretive price tag

Price had been the main sticking point ahead of the agreement.

No official price has been given but it is estimated to be worth over US$400 billion (S$501 billion).

President Vladimir Putin said in a statement to the Russian news channel Rossiya: "The price is satisfactory for both sides. It is tied, like it is envisaged in all our international contracts with Western partners, specifically our partners in Western Europe, to the market price on oil and oil products. It is an absolutely calibrated, general formula for pricing."

Analysts say they believe the final price was "closer to what Russia wanted than what China was initially prepared to pay".

But the missing price details raised the suspicions of some Russians, who suspect Mr Putin dropped the price significantly for China in a desperate manoeuvre to ensure a steady cash flow for Gazprom in the face of sinking revenue and Western sanctions.

What it means for Russia

Russia has been keen to find an alternative energy market for its gas as it faces the possibility of European sanctions over the crisis in Ukraine.

Mr Putin was keen to strike a deal before this week's annual Russian economic showcase in St Petersburg, which has been overshadowed by Western sanctions imposed over the Ukraine crisis and cancelled appearances by US chief executives.

Mr Alexei Miller, Chief Executive of Gazprom said the new deal was "the biggest contract in the entire history of the USSR and Gazprom - over 1 trillion cubic metres of gas will be supplied during a whole contractual period." That is equivalent to about 10 per cent of Gazprom's annual gas sales of 477 billion cubic metres to domestic and international customers. Revenue from those sales totalled US$93 billion last year.

Gazprom shares rose 2 per cent on the news of the deal.

What it means for China

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.

The price "reflects China's willingness to pay more for cleaner fuel," wrote IHS Energy analysts in a research note.

Over the last 10 years China has found other gas suppliers. Turkmenistan is now China's largest foreign gas supplier, and last year it started importing piped natural gas from Myanmar.

China would become Russia's No. 2 gas market, behind Germany, under the deal, which would also tighten ties between the two neighbours as they seek a way to counterbalance US influence in the world.

What it means for the LNG market

The deal comes at the expense of a growing number of liquefied natural gas (LNG) producers as it may make their fuel shipped by tankers less competitive.

The accord will make planned LNG export projects less likely to be built because the additional Russian gas may cut prices, analysts say.

The agreement gives China, the world's biggest energy consumer, greater leverage when negotiating LNG contracts, said Trevor Sikorski, head of natural gas, coal and carbon at Energy Aspects Ltd., a consultant.

"All of a sudden, it's going to be a very competitive gas market," he said.

"The deal changes the level playing field," said Thierry Bros, an analyst at Societe Generale in Paris.

Sources: BBC, CNN, Washington Post, Wall Street Journal, Bloomberg

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