What price "cheaper' gas from Russia?

What price "cheaper' gas from Russia?
A posed photo of pipelines.

China is likely to have driven a hard bargain for cheaper gas from Russia before sealing a long-awaited deal, but the Russians could reap longer-term benefits from gaining a new market for their energy exports and Chinese investment in power infrastructure.

Both sides can also expect to garner some approval back home for securing an arrangement that allows them to diversify away from a reliance on Western markets amid rising geopolitical tensions, say analysts.

The details of the 30-year contract inked on Wednesday, which will see Russia supply 38 billion cubic metres of gas to China annually, have not been released. Russian President Vladimir Putin did say that both sides were "pleased by the compromise reached on price and other terms".

The deal had been in limbo for about a decade even though both sides recognised the need for such a partnership.

"Russia has a huge resource base in its east, and right across the border in China is a complementary huge energy demand. The fact that this deal hasn't happened for 10 years is what is surprising," said Ms Holly Morrow, a Fellow at the Harvard Kennedy School's Geopolitics of Energy Project.

"I think the Chinese have been frustrated that they have not been able to get more energy cooperation from Russia," she added, noting that China needs natural gas to fuel its economy and help wean its people off highly polluting coal.

The sticking point in negotiations had been the pricing: Beijing held out for the cheapest possible cost, and leveraged on its relatively low-priced import deals signed earlier with Central Asian suppliers such as Kyrgyzstan - reportedly averaging about US$200 (S$250) per 1,000 cu m.

But Moscow wanted a price equal to or higher than what it was charging Europe, its primary market. It cited the higher cost of delivering the gas across rough terrain from Siberia to China's coastal hubs via a pipeline still to be built, the Beijing News Daily reported.

The daily quoted researcher Sun Yongxiang at the Development Research Centre of the State Council as saying that Russia asked for US$388 per 1,000 cu m while the Chinese offered US$380, which is also roughly the price for European customers.

But industry estimates cited by Reuters put the final price as closer to US$350. The gas contract will cover a little more than half of the 70 billion cu m envisaged under a bilateral framework agreement in 2009.

Some analysts question whether even a US$350 price represents the most favourable term for Beijing, given that the full details of the agreement are unknown, and China would only start to receive gas supplies around 2020, when it would be difficult to pinpoint energy prices.

But in any case, Beijing was likely to have maximised its advantage to secure a satisfactory deal as it has the upper hand in negotiations with Russia, which is under pressure to woo new partners in the East, say some analysts.

After all, its key customers in Europe are scaling back their reliance on Russian gas after Moscow's seizure of Crimea from Ukraine prompted the West to threaten sanctions, noted analyst Ren Haoming at research house CIConsulting, adding that "Russia urgently needs China's full political and economic support".

China also will provide US$20 billion to finance development of gas and energy infrastructure.

Rather than focusing on which side gained more in economic terms from the deal, both should look at the broader implications of the partnership for their national security interests, argue experts such as Professor Lin Boqiang of Xiamen University's China Centre for Energy Economics Research.

Breaking the 10-year impasse allows China to move forward in ensuring smooth supplies of clean energy from diverse sources to reduce its reliance on the West. Last year, China consumed about 170 billion cu m of natural gas and this is forecast to rise to 420 billion cu m by 2020.

Dr Charles Ebinger, director of the Energy Security Initiative at Brookings Institution in Washington, said the deal "shows quite dramatically that the Russians are seriously looking at alternative markets".

"I think it's a setback for US foreign policy because it means any kind of sanction will have a lot less impact," he told The Straits Times.


Additional reporting by Jeremy Au Yong in Washington

This article was first published on May 23, 2014.
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