Details of China-Russia Gas Deal Put ‘Historic’ Agreement in Perspective.
By Thijs Van de Graaf, May 28, 2014,
On May 21, after a decade of arduous negotiations, Russia finally signed a gas deal with China. The agreement foresees the delivery of 38 billion cubic meters (bcm) of Siberian gas a year to China for 30 years, starting around 2018. Media commentators have been quick to call the deal “historic,” and Russian President Vladimir Putin trumpeted it as “the biggest contract in the history of the gas sector of the former USSR.” With the deal’s value of $400 billion and the involvement in it of two major non-Western powers, one might be tempted to see the agreement as an economic and geopolitical game-changer. A closer look at some of the details, however, puts the agreement in perspective.
On the face of it, the headline figure of $400 billion, or about 20 percent of Russia’s GDP, is indeed dazzling. Yet this figure paints a misleading picture about the scale of the economic benefits the agreement will yield for Russia. The deal runs for a 30-year period, from 2018 to 2048, translating into $13 billion of additional annual export revenues for Russia. That figure pales in comparison to Russia’s total export revenues, which last year amounted to $593 billion. So, while the value of the contract is significant, it is hardly a game-changer.
Consider next the volume of gas: 38 bcm per year. This amounts to 16 percent of Gazprom’s current exports and 23 percent of China’s current gas consumption. Given that both Gazprom’s exports and China’s consumption are expected to rise, the deal’s shares in each will be even lower when the gas starts to flow. Admittedly, the agreement will likely turn China into Gazprom’s second-biggest customer, behind Germany, and the volumes may grow over time. Yet, last year, Gazprom supplied Europe with more than 160 bcm of gas, dwarfing intended deliveries to China. Europe will thus remain the key export market for Russian gas in the years to come.
Then there is the “detail” of the gas fields that have yet to be developed and the pipelines that have yet to be constructed. Gazprom will need to invest a whopping $55 billion, while its Chinese counterpart, China National Petroleum Corporation (CNPC), will invest some $22 billion for similar infrastructure in China. Experts warn that Gazprom may not be able to develop eastern Siberian gas fields—Kovykta in the Irkutsk region and Chayanda in the Sakha Republic—in time to serve the Chinese market. Of course, any diversion of existing trade flows risks disrupting ties with existing customers. To get the gas to China, Russia will have to build a new, roughly 2,500-mile gas pipeline from Siberia to Vladivostok, just north of the Chinese border. The pipeline could connect to China at three or four points.
Another sticking point is the price that China will pay for Russia’s gas. In fact, disagreement over the price was the reason the negotiations dragged on for so long. The agreed price was not disclosed in the press, but most commentators suspect that it is around $350 per thousand cubic meters, or less than the average price of $350-$380 paid in Europe and far below the $485 Ukraine has to pay since the recent price increases. China will make a $25 billion prepayment to help Russia finance the necessary infrastructure, a move that may have helped get China a further discount on the gas price.
There were rumors that the deal would involve payments in either rubles or yuan, prompting commentators to assert that the “world is moving away from American financial hegemony” and even to declare “the birth of a Eurasian Century.” Obviously, these claims are exaggerated. The Russian energy minister has since specified that China will pay for Russian gas in U.S. dollars, which makes sense in light of the gigantic dollar reserves China has. China will not risk deflating the value of these dollar reserves by turning its back on the petrodollar.
Overall, the deal does not represent the formation of a Eurasian geopolitical entente. China and Russia are still wary of each other over a host of other issues, such as Russia’s arms exports to China’s neighbors. Putin’s pivot to Asia seems driven in the first instance by commercial interests: a desire to tap into a booming gas market in China—with China’s gas consumption expected to climb from 170 bcm in 2013 to 420 bcm in 2020—and the rest of East Asia. Remember that the envisaged gas pipeline will not only bring gas to China but also to Vladivostok, where Gazprom is building a liquefied natural gas export terminal to be able to serve the South Korean and Japanese markets.
Tactically, of course, the gas agreement is convenient for the Kremlin, as it sends a political signal that Russia does not stand isolated on the global diplomatic scene but still has friends in the wake of events in Ukraine and Western sanctions against Russia. The Ukraine crisis probably explains much of the timing of the agreement and also why China had the upper hand in the negotiations over the price. For China, cheap Russian gas may help the country shift away from dirty coal and uncertain oil imports from the Middle East.
How does this all affect Europe? In the short term, nothing much changes, since it will take four to six years before Russian gas starts to flow to China. When the Siberian gas starts to flow eastward, Russia’s bargaining hand may be strengthened toward Western utilities in negotiations about price. Yet, this need not be viewed through a strict geopolitical lens, as U.K. Energy Secretary Ed Davey seemed to do in early May when he said that the G-7 was trying to “disarm Russia’s energy weapon.” Russia is simply trying to diversify its customers in the same way that Europe is searching for alternative suppliers. The deal with China is a significant, but not yet historic step in this direction.
Thijs Van de Graaf is a post-doctoral researcher in international energy politics at Ghent University.