Russia’s second deal with China not the triumph it’s presented to be

Russia - China pipeline
Source: DollarPhotoClub

Russia and China have just signed a framework agreement for a new gas deal; the second after the much publicised $400 billion agreement to supply China with 38 Bcm of Russian gas, beginning in 2018, that was signed in May.

The new agreement will see Russia supply China with another 30 billion cubic metres of gas every year for the next three decades through the Altai pipeline. The pipeline, also referred to as the ‘western route’, is a proposed pipe transporting gas from western Siberia to China.

The new Russia-China deal is an important statement on Russia’s part, eager to show that it is capable of securing alternative markets for its gas, after the Ukrainian conflict threatened Russia’s business relations with its European clients.

However, the reality of Russia-China relations is not as rosy as Russia would like to present it. For one, as Reuters points out, the memorandum was non-binding, and falling oil prices weaken Russia’s bargaining position. Russia needs to sell gas as it relies on it’s exports to finance it’s economy. And with economic sanctions in place and Europe increasingly looking towards alternative sources of gas, Russia really needs to sell gas to China.

China, on the other hand, while needing to increase gas in its energy mix to tackle air pollution, has lots of options in securing gas volumes; including imports from Central Asian countries such as ex-Soviet republic Turkmenistan. In 2013, China signed an agreement to increase gas deliveries to its north-western region from Turkmenistan to 65 bcm by 2020. As pointed out by Vladimir Drebentsov, Vice President, Economics and Corporate Social Responsibility, BP Russia, speaking at the recent EAGC conference in London, Russia might find it difficult to compete with countries like Turkmenistan. Buying gas from Central Asia, China not only gets cheaper prices, but also controls the whole value chain from the well to the pipeline.

While Russia is keen to portray the recent deal as a triumph of Russian diplomacy, there are important issues that throw a shadow on the Russia-China economic relations. One is the price of the proposed gas deal. Falling oil prices, in turn, depress gas prices and this makes talks more difficult for the Russian party.

“It remains challenging to finalise that deal – again on the pricing of gas. The current falls in oil prices would make the price talks tougher. China would hope for lower gas prices (at the border) versus eastern as it’s a longer journey to reach the consumers,” Zeng Xingqiu, industry veteran and an adviser to China National Petroleum Corporation, told Reuters.

Another issue is that – while the proposed ‘western route’ is being discussed – the details of the much publicised ‘eastern route’ deal penned in May, have not been agreed on.

The agreed project involves the development of the Kovykta and Chayanda fields in the remote Yakutia region in eastern Siberia, as well as the construction of a 2,500 mile long gas pipeline over very difficult terrain to China’s industrial heartland. The details of the payments have not been agreed, with some analysts saying that the project might be at the ‘edge of profitability’ for Gazprom, which has already begun building the pipeline without waiting for the payment issues to be ironed out.

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