China & Russia Sign Major Gas Agreement
May 21, 2014 • 6:59PM

To the surprise — and chagrin — of the international media, all of which had reported that Russia and China again would not be able to reach a gas agreement, the subject of negotiations now for almost a decade, an agreement was in fact reached early this morning in Shanghai. The papers were signed in the presence of the Presidents of the two countries. By this agreement, Russia will provide China with 38 billion cubic meters of natural gas each year. China will build the pipeline within its own borders, while Russia will be responsible for the development of the fields and pipeline construction in its territory. The 30-year deal is estimated to be worth over $400 billion, and China agreed to a prepayment of $25 billion, presumably to help finance the infrastructure investments required in Russia.

According to televised statements by Russian President Vladimir Putin, supplies for the first stage of the contract involve a massive four-year development plan for the Kovytka gas field in northern Irkutsk Region, near the northern end of Lake Baikal, and the Chayanda field in the Yakutia-Sakha Republic, farther to the northeast. Russia plans to put the equivalent of $55 billion into the project, while Chinese infrastructure investment will reach at least $20 billion, President Putin said. He remarked:

"Without any exaggeration, this will be the biggest construction project in the world, over the next four years."

He noted that the fields are large enough to "guarantee supplies for 50 years," starting in 2018; he emphasized that this means not only for export, but for Russia's own energy needs.

The negotiations had been hung up on the issue of price, as both parties are tough negotiators. Perhaps the importance of the deal in the context of the historic summit in Shanghai played a role in bringing it to a close. Putin said that the parties had negotiated far into the previous night, and consummated the deal the next morning.

It is the largest gas deal ever signed by the Russian gas industry. It will go a long way in meeting China's need for energy, but it also provides an ideal outlet for the Russian gas industry to counter any sanctions by the EU and the United States on Russian gas. Gazprom CEO Alexsei Miller said that talks would continue regarding bringing gas from already developed fields in western Siberia to the Chinese market, while Putin underscored that linking together Russia's western pipeline network with the new areas in eastern Siberia, would provide flexibility for delivery to different markets. The amount involved in the new China contract is more than a third the total currently being exported to Europe. While the price of gas in the agreement remains a secret, Putin said that the price was pegged to the market price of oil and oil products, similar to the price for Europe. It also serves to cement the important energy relationship between the two countries.

The broader strategic significance of the deal was not lost on media outlets such as USA Today, which commented that "it heralds a pivot east for Russian business amid ongoing tensions with the West over Ukraine," and that it is a move by "Putin to aggressively shift the country's commercial interests east." The news report quotes Russian Academy of Sciences expert Sergei Utkin adding that "it's a demonstration of the fact that Russia always has and always will have other options to develop relations elsewhere. The threat of isolation coming from the West will not be complete."

See also: China & Russia Move Their Relationship to a New Level of Integration