Research and analysis

China: energy cooperation with Russia

Published 1 June 2014

0.1 Detail

Russia’s Gazprom and China National Petroleum Corporation (CNPC) signed off on a contract for Russian gas supply to China in the final hours of Russian President Putin’s visit to Shanghai. The deal, under negotiation for 14 years, has a total value of $400 bn. (£235 bn) over its 30 year term and will supply China with 38 billion cubic metres per annum (bcma) of gas from 2018. The parties to the contract have agreed to an initial investment of around $50 bn. from Gazprom and $20 bn. from CNPC to fund what will be one of the largest construction projects in the world. Full details of the deal have not been made public.

Initial analyst reactions in Moscow assess the deal as economically neutral or even value destructive on its own. But they, like Gazprom, expect that the door may now open to a range of more profitable contracts with the Chinese, including investment in Russia’s ambitious Liquid Natural Gas (LNG) development plans, and further pipeline supply by Gazprom’s favoured western route.

This deal was also important to Beijing. With gas consumption set to quadruple by 2035 (IEA), China must source gas from outside its own borders, particularly over the longer term as it seeks support for a shift away from coal, which currently makes up 65.8% of the energy mix and is responsible for serious air pollution.

Ultimately China’s market can provide a useful source of growth for Russian gas. The deal builds on extensive existing energy cooperation. China was the third largest importer of Russian oil in 2012, taking 480,000 barrels per day (bpd), 9% of its imports. The majority of Russia’s 7 million bpd still go west not east, but this too is beginning to change. In March 2013, China National Petroleum Corp (CNPC) paid the first $20 bn advance of an estimated $70 bn. prepayment to Rosneft for a 25 year oil supply agreement (worth $270 billion), which could eventually make China Russia’s biggest single market for oil.

0.2 Comment

The deal brings mutual benefits: Gazprom demonstrates that it has other options for gas sales away from the EU and China secures some of the gas it needs in the longer term. On present plans, Russian gas would make up 12% of China’s total gas demand in 2020, with gas from Central Asia and Myanmar still playing an important role.

In the longer term Russia hopes that more profitable opportunities will emerge. This may eventually lead to a further deal to supply gas from Russian fields currently connected only to EU markets.

The EU should not worry about this development. Russia can increase supply to the EU from developed gas fields in the west of Russia with existing pipelines. The fields which will provide feed gas for this agreement could never supply EU markets. And if China gets gas by pipeline, total LNG demand will be reduced, helping to keep prices at an affordable level.

0.3 Disclaimer

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