A couple of weeks ago I wrote a piece for LobeLog on Russia’s move to expand its presence in Asian energy markets and overall to boost its economic engagement with China. Yesterday that plan got a major boost when Gazprom and the Chinese government reached an agreement that was literally years in the making, setting up Russia’s undeveloped Siberian gas fields to supply natural gas to China for at least the next 30 years. It looked like talks had broken down two days ago, to the point where I had actually written something on their collapse for LobeLog, but presumably just to spite me the two sides managed to bridge the gap between them and cut a deal yesterday, rendering my piece moot.
When I say that the Russians and Chinese “bridged the gap between them,” what that probably means (probably because the terms of the deal aren’t public yet) is that Russia caved to China’s demands on price. Unconfirmed reports say that China will be paying about $10 per million BTUs, which is in line with what they pay other gas suppliers like Turkmenistan and far below the $12+ per million BTUs that Russia charges its European customers and that it was looking to get out of the Chinese. The Chinese really had no reason to budge; they don’t need to buy Russian natural gas nearly as much as Russia needs to sell it, because they get enough for their current needs from their existing suppliers. China is hoping to move away from coal and petroleum because of its horrific air pollution problem, but even as its natural gas demand goes up it could have filled the extra demand with more gas from current suppliers, by tapping into the coming liquefied natural gas boom, or by developing its own substantial shale gas reserves. So this deal with Russia was as much about geopolitics as it was about energy, and China clearly wasn’t going to pay a penny more than it had to just to get friendlier with Moscow.
Russia, on the other hand, gets quite a bit out of this deal. First, it gets a foot in the door (well, another foot; they already do sell some oil to China) of a massive growing energy market and manages to ease its dependence on gas sales to Europe at a time when the EU is slapping sanctions on its business leaders over the Ukraine mess, though in the short-term it’s still very dependent on gas sales to Europe. Gazprom is kind of getting screwed, since $10 per million BTUs is probably slightly below its break-even point, though it’s possible that the Chinese will pick up some of the infrastructure costs associated with building the new pipeline from the Siberian fields into China.
For the US and EU, this deal does put an expiration date on the ability of economic sanctions to really damage Russia’s economy. In the short-term, as I say, Russia can’t escape its dependence on gas sales to Europe; the gas that’s being sold to China is going to come out of newly tapped fields in Siberia, whereas Russia’s western gas fields are still tied to its European business. Building the kind of cross-country infrastructure that would let Russia mingle its western and eastern gas reserves is going to take a lot of time and a lot of money at a time when Russia’s economy is in the tank. But as the Siberia gas development comes online and Russia makes other moves into Asian markets, like that proposed oil pipeline to India, it will start depending on its European gas sales less and less.