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Posted on Sustainabilitank.info on May 22nd, 2014
by Pincas Jawetz (pj@sustainabilitank.info)

 

BEIJING, May 21, 2014  —  China and Russia signed a $400 billion gas deal on Wednesday, giving Moscow a megamarket for its leading export and linking two major powers that, despite a rocky history of alliances and rivalries, have drawn closer to counter the clout of the United States and Europe.

The impetus to complete the gas deal, which has been talked about as a game-changing accord for more than a decade, finally came together after the Ukrainian crisis forced Russia’s president, Vladimir V. Putin, to urgently seek an alternative to Europe, Moscow’s main energy market. Europe has slapped sanctions on Russia and sought ways to reduce its dependence on Russian energy.

Mr. Putin, on a two-day visit to Shanghai, and the Chinese leader, Xi Jinping, oversaw the signing of the contract between Gazprom and the China National Petroleum Corporation, the biggest natural gas deal Russia has sealed since the collapse of the Soviet Union. The contract runs for 30 years and calls for the construction of pipelines and other infrastructure that will require tens of billions of dollars in investment.

Ostensibly on the same side during the Cold War, the Asian neighbors even then competed for global influence with their divergent brands of communism. They fought a brief but explosive border war in 1969, and later took opposite sides in conflicts in Vietnam and Afghanistan.

They have similar views of the United States, however, including opposition to its unilateral military actions in Kosovo, Iraq and Libya, and wanted to take Uncle Sam down a peg or two.  Mr. Putin, in particular, wanted to make a point of showing that the United States and its NATO partners were in decline.

The deal offered a lift for the Russian economy, he said, and for Mr. Putin, China’s validation would improve Russia’s world image.

At the same time, Mr. Xi is unhappy with the Obama administration on issues ranging from Washington’s outspoken support of its military alliance with Japan, its criticism of China’s actions in the South China Sea, and its hard line on cybertheft.

Although China had expressed neutrality over the Ukraine crisis because of the take-over of land – the strained relations with Washington in other spheres tip China’s position in favor of Russia.

The final price of the Russian gas, which will flow through a 2,500-mile pipeline from two fields in Siberia, was not disclosed, and energy markets were trying to parse who gained the bigger advantage.

Russia had been holding out for a price close to what European countries pay, and China for a price akin to the cheaper gas it buys from Central Asia, energy experts who tracked the talks said.

With Russia’s economy near recession and the International Monetary Fund projecting 0.2 percent growth this year, Mr. Putin was desperate to get the deal done, energy experts said.

The chief executive of Gazprom, Alexey Miller, said the contract called for Russia to supply 38 billion cubic meters of gas annually over 30 years, making the price about $350 per thousand cubic meters. In 2013, the average price of Gazprom’s gas in Europe was about $380 per thousand cubic meters.

“The pricing appears to be between European Union prices and Turkmenistan prices,” said Joerg Wuttke, the president of the European Union Chamber of Commerce in China. “We will have to wait for the next few months to learn about the details.”

Morena Skalamera, a fellow at the Geopolitics of Energy Project at Harvard, said Mr. Putin was more willing to concede on price than he had been before the Ukraine crisis.

“If the European market was a question mark before the Ukrainian crisis, now with sanctions, Putin needed China even more,” she said.

“Politically, it is important for Putin to show that the ‘Greater Russia’ is back on the international scene and that it has other, non-Western options to restore its rightful place.”

In exchange for a lower price, China offered a loan of about $50 billion that will finance development of the gas fields and the construction of the pipeline by Russia up to the Chinese border, Ms. Skalamera said. The Chinese would build the remaining pipeline, and gas is scheduled to start pumping in 2018, she said.

In remarks after the signing, Mr. Putin stressed that the price of the gas was based on the market price for oil, just as it was for Russia’s gas supplies to European countries. “The gas price formula, as in our other contracts, is pegged to the market of oil and oil products,” Itar-Tass quoted him as saying.

Without the oil price benchmark, Russia would be under pressure to renegotiate European prices, said Kenneth S. Courtis, a founding partner of Thames Investment. The price of Russian gas to Europe is based on fluctuations in oil prices, making it more expensive than gas that China buys from Central Asia, he said.

Even with this new agreement, Europe will remain Russia’s biggest market, but Siberian natural gas does give China a cleaner substitute for the fossil fuels — coal and petroleum — that provide most of its energy needs, and cause much of the pollution smothering China’s cities. China will  have diverse suppliers of gas not making it not dependent only on the Russians.

Globally, the newly marketed shale gas technology allows for additional potential gas suppliers to join the international market. The subject of gas supplies becomes thus a main issue of geopolitics and Europe is best advised not to find itself dependent on the goodwill of Russia. So we see no reason for Austria continuing to back the construction of new pipelines for Russian gas – the like of  “South Stream” and let Europe use the funds in order to develop indigenous renewable sources of energy instead.

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