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Russia-China Gas Relationship On The Rocks

The Russian media is reporting an indefinite delay in the final signing of the contract for Russia’s state-run Gazprom to supply China with gas through a new Siberian pipeline because of a decline in Chinese demand for the fuel.

The lower demand stems from an economic slowdown in China, reducing the country’s need for gas, as well as the increased availability of liquefied natural gas (LNG) from countries such as Australia. This is according to Valery Nesterov, an analyst with the Moscow investment bank Sberbank, who spoke in an interview published July 22 in the Russian-language financial newspaper Vedomosti.

In Beijing on Nov. 9, 2014 Russian President Vladimir Putin and Chinese President Xi Jinping signed a preliminary agreement under which the Kremlin-run monopoly Gazprom would eventually supply nearly one-fifth of the gas China is expected to need until 2020.

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All told, the deal, nearly as huge as the countries’ $400 billion gas deal signed in May of last year, meant Gazprom would supply up to 30 billion cubic meters of gas per year from western Siberia to China in the next 30 years through the new pipeline, called the Power of Siberia-2.

Both gas deals were seen as a way to help jump-start Russia’s flagging economy, which was struggling because of a lack of economic reforms since the breakup of the Soviet Union and economic sanctions imposed by the West because of Moscow’s involvement in the strife in neighboring Ukraine.

It also was seen as a way to diversify its customer base and indemnify itself against the possibility that Gazprom’s valuable customers in Western Europe find alternative sources of gas to reduce their reliance on Russia. These clients get about 30 percent of their gas from Russia, and about half of it is delivered by a pipeline that runs through embattled Ukraine.

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At one time it seemed that China would be the ideal customer, with an ever-growing economy and thus an ever-growing need for energy. China’s gas consumption had grown by between 12 percent and 13 percent during 2013.

But during 2014 it fell by 8.5 percent. In the first half of 2015, it has recovered slightly, by 20 percent, according to Nesterov. Originally, the deal was seen as making China the biggest consumer of Russian gas.

Because of the cost of building the Russian pipeline, Gazprom was comfortable proposing that the China National Petroleum Corp. (CNPC) pay a high price for the gas, according to Sergei Sanakoyev, the president of the Russia-China Analytical Center in Moscow. But China now seems reluctant to pay that price, he said, and is willing to take its time to get Russia to agree to lower it.

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“Gazprom offers CNPC a high price, explaining this by the high cost of the Power of Siberia-2 construction. China is ready to build the pipeline at a cheaper cost and at public tender, so its companies could participate and for the construction price to be transparent,” he told the Russian television network RT. “Gazprom refuses, and China does not hurry.”

Gazprom and CNPC already have signed an agreement on the broad outlines of the gas deal.

Meanwhile, further negotiations are now “non-intensive,” one official told Vedomosti, but “could be given a new impetus during Vladimir Putin’s upcoming trip to China in early September.

By Andy Tully of Oilprice.com

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  • zhuubaajie on July 28 2015 said:
    Gazprom's pipeline building costs is at least 100% higher than what China can build the same pipeline at. With Turkmenistan agreeing to add another 15 bcm per year of Caspian gas, there really is no hurry for China. Why would China aqree to easily avoidable high costs when there is plenty of supply?

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