Russia-China Gas Deal: The Winding Road to an Agreement

By Thane Gustafson, Zhouwei Diao, Jenny Yang and Matt Sagers

After a decade of negotiation, the Russia-China gas deal was finally concluded today during Russian President Vladimir Putin’s visit to China. The last key sticking point—the starting gas price—was finally agreed.
Key Implications

Pressures from both Russia and China had built up steadily in recent years, finally culminating in a gas sales and purchase agreement.Gazprom is under increasing geopolitical and competitive pressure to diversify its market toward the East, while China’s gas market remains supply constrained as demand continues to surge.

The final agreed price is believed to be closer to what Russia wanted than what China was initially prepared to pay. In exchange, the idea of a prepayment, similar to what was agreed in the Russia-China oil deals, was dropped. This higher price level reflects China’s willingness to pay more for cleaner fuel, consistent with its efforts on domestic gas price reform to accommodate rising supply costs.

The northeastern provinces in China can absorb the bulk of the new gas supply at the current regulated price level. China National Petroleum Corporation (CNPC) is expected to earn profits of more than $1 billion a year on its sales of Russian gas into northeastern China. But Russian gas is not likely to displace any LNG imports from the coastal region on this cost basis.

Gazprom’s centrality as chief exporter is reinforced, but with a growing burden.The pipeline export of 38 Bcm together with supply to Gazprom’s Vladivostok LNG project will let the company retain its role as the premier Russian gas player in Asian markets, but it also increases its financial and management burden. 

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