Russia, China Add to $400b Gas Deal

Russia, China Add to $400b Gas DealRussia, China Add to $400b Gas Deal

China and Russia deepened their energy ties with a second deal that reduces Russia's reliance on Europe and would secure almost a fifth of the gas supply China needs by the end of the decade, Bloomberg reported.

Russian President Vladimir Putin and Chinese President Xi Jinping signed the preliminary gas-supply agreement in Beijing the day before US President Barack Obama arrived in the Chinese capital for the Asia-Pacific Economic Cooperation summit. The deal is slightly smaller than the $400 billion accord reached earlier this year, shortly after Russia’s annexation of Crimea.

Russian oil firm Gazprom is negotiating the supply of as much as 30 billion cubic meters of gas annually from developments in West Siberia to China over 30 years. At the same time, another Russian producer Rosneft agreed to sell a 10 percent stake in a Siberian unit to state-owned China National Petroleum Corp. The export of new supplies to Asia increases the possibility of a glut on global energy markets by early next decade. Once deliveries begin, China would replace Germany as Russia’s biggest gas market, even as relations have aggravated with the US and Europe over the Ukraine crisis.

 Huge Exports

The gas glut could resemble what has happened in the iron ore industry, according to Kenneth Courtis, former Asia vice chairman at Goldman Sachs Group Inc. That industry has seen miners ramp up production in the teeth of falling prices, shaking out higher cost suppliers. “There is going to be new supply of natural gas from everywhere,” including Australia, the US, Canada and Mozambique, Courtis wrote in an email. The accord will make Russia rely more on China "economically and politically,” said Lin Boqiang, director of the Energy Economics Research Center at Xiamen University.

“China is probably the only country in the world that has both the financial ability and the market capacity to consume Russia’s huge energy exports on a sustainable basis over a long period of time,” Lin said. The two deals could account for almost 17 percent of China’s gas consumption by 2020. Russia may start selling gas to China within four to six years as part of its agreement with CNPC, Alexey Miller, the chief executive officer of Gazprom announced.

A second China-Russia agreement adds to pressure on liquefied natural gas suppliers, mainly in Australia where costs to build new plants are high. Gas will account for more than 10 percent of China’s energy consumption by 2020, compared with 6 percent currently, according to the National Development and Reform Commission, China’s national economic planner.