Moscow and Beijing signed a contract to supply China with hundreds of billions of dollars of Russian gas, in a long-stalled deal that could give Russian President Vladimir Putin a boost as his relations with the West have sharply soured.
By Brian Spegele,, Wayne Ma , Gregory L. White
BEIJING—Moscow and Beijing signed a contract to supply China with hundreds of billions of dollars of Russian natural gas, in a long-stalled deal that could give Russian President Vladimir Putin a boost as his relations with the West have sharply soured.
The two sides were circumspect about many of the details, raising questions from some analysts about whether they will have to negotiate further before China can tap Russian natural-gas supplies to meet its growing energy needs.
China would become Russia’s No. 2 gas market, behind Germany, under the deal and tighten ties between the two countries, as they seek a way to counterbalance U.S. influence in the world. Mr. Putin signed the accord with Chinese President Xi Jinping while on a symbolically significant two-day visit to Shanghai.
Mr. Putin will return to Moscow with a concrete symbol of progress on his promise to deepen Russia’s relationship with emerging markets in Asia. The crisis over Crimea has left Moscow estranged from the U.S. and Europe, which has added urgency for Mr. Putin to seal the gas deal with China.
“This will be the biggest construction project in the world for the next four years, without exaggeration,” Mr. Putin told reporters. The deal also called for at least $75 billion in spending on pipelines and other infrastructure on both sides of the Russia-China border.
The deal was struck on Wednesday between the countries’ largest respective state-controlled energy companies—China National Petroleum Corp. and OAO Gazprom. Under the agreement, Russia will supply 38 billion cubic meters of natural gas a year to China, equal to more than one-fifth of Chinese gas consumption last year.
Gazprom CEO Alexei Miller told Russian media the two sides had signed a contract worth $400 billion over its 30-year life. “This is Gazprom’s biggest contract. We don’t have a contract like this with any other company,” Mr. Miller said, according to Russian news agencies.
It isn’t clear how hard a bargain China drove, or how much Russia might have given up, to clinch the deal. Mr. Miller said the price of gas under the deal is a commercial secret. Gazprom said the deal included a pricing formula linked to crude oil and that it carried mutually beneficial terms.
The lack of details left doubts among some experts, though. “The question is, what is the starting price and the basis for implementing the formula?” said Michal Meidan, an independent consultant in energy geopolitics. “If this is still open, there is scope for more haggling. This is a political deal that seems to meet China’s conditions but leaves it open for further disagreements.”
“Strategic benefits of the deal, however, outweigh the financial issues because China is a large market,” said Ildar Davletshin, oil and gas analyst at Renaissance Capital.
Alexei Pushkov, a senior Russian parliamentarian from the ruling United Russia party, wrote on his Twitter account: “The 30-year gas contract with China is of strategic significance. B. Obama should give up his policy of isolating Russia: It won’t work,” he said, referring to U.S. President Barack Obama.
The deal was reached after marathon negotiations during his trip to Shanghai, Mr. Putin said. “Our Chinese friends are complicated, difficult negotiators,” the Russian leader said. “As you know, work went on until 3:30 a.m. today and then started again this morning practically from the center of the field.”
He added that “as a result of mutual compromises, we were able to reach not only acceptable but fully satisfactory terms in this contract for both sides. Both sides were satisfied with the compromises that were reached on price and other terms.”
As of Wednesday afternoon, a spokesman for PetroChina Co., the bourse-listed arm of CNPC, had said price differences were outstanding.
China paid about $10 per million British thermal units last year for natural gas piped from its biggest foreign supplier, Turkmenistan, and likely wanted a similar deal with Russia, analysts said. However, that level was below an average price of $12 per million BTUs that Gazprom would need to break even, they added.
Price has long held up the talks. Over the past decade the two sides have announced supply deals but said a final price would be negotiated later. “What is new here is that there is an agreement on the price,” said Lin Boqiang, director of the China Center for Energy Economics Research. Mr. Lin said he wasn’t aware of the pricing details of the deal.
The shipments to China would also represent a nearly 25% increase in Russia’s gas exports outside the former Soviet Union. Mr. Putin said that under the deal, Russia would spend at least $55 billion to develop the necessary infrastructure in Russia, while Beijing would spend $20 billion within its territory.
The two sides didn’t mention whether China would take stakes or participate in developing gas supplies on the Russian side, something experts say has been long sought by Beijing as a way to secure supplies.
Analysts said one of China’s main bargaining chips was that it was the only customer for gas in Russia’s East Siberia region, which is far from customers in western Europe. “It’s not going to go anywhere but to China,” said James Henderson, a senior researcher at the Oxford Institute for Energy Studies.
China, however, may need Russian gas to meet its latest targets for natural-gas consumption, which are pegged at 420 billion cubic meters a year by 2020, up from 170 billion cubic meters in 2013. Although the country has pinned hopes on ramping up domestic production of unconventional shale and coal-bed methane gas, large-scale output may still be at least a decade away. China wants to double the share of the cleaner-burning fuel in its energy mix to 10% by 2020 amid heightened worry over pollution.
Over the past decade, China has signed supply contracts with key suppliers in Qatar, Myanmar, Australia and Indonesia for imports of liquefied natural gas—the chilled and exportable form of the cleaner-burning fuel—and has been constructing facilities along its coast to import LNG.
In the past few years, major Chinese oil companies have gone one step further and bought equity stakes in LNG projects in Australia and Canada, with an eye toward shipping the fuel back home. Despite these new sources of natural gas, China’s gas consumption continues to outpace supply.
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