Russia, China add to $400-billion gas deal with second supply pact

By JAMES PATON and AIBING GUO
Bloomberg

China and Russia deepened their energy ties with a second blockbuster deal that lessens Russian reliance on Europe and would secure almost a fifth of the gas supplies China needs by the end of the decade.

Russian President Vladimir Putin and Chinese President Xi Jinping signed the preliminary gas-supply agreement in Beijing as US President Barack Obama arrived in the Chinese capital for the Asia-Pacific Economic Cooperation summit.

The deal is slightly smaller than the $400 billion pact reached earlier this year, shortly after Russia annexed Crimea.

Russian oil firm OAO Gazprom is negotiating the supply of as much as 30 billion cubic meters/year of gas from developments in West Siberia to China over 30 years, it said. At the same time, another Russian producer, OAO Rosneft, agreed to sell a 10% stake in a Siberian unit to state-owned China National Petroleum Corp.

The export of new supplies to Asia increases the possibility of a glut on global energy markets by early next decade. Once deliveries begin, China would supplant Germany as Russia’s biggest gas market, even as relations have soured with the US and Europe over the Ukraine crisis.

Huge Exports

The gas glut could resemble what’s happened in the iron ore industry, said Kenneth Courtis, chairman of Starfort Holdings and former Asia vice chairman at Goldman Sachs. That industry has seen miners ramp up production in the teeth of falling prices, shaking out higher cost suppliers.

“There is going to be new supply of natural gas coming from everywhere,” including Australia, the US, Canada and Mozambique, Courtis wrote in an e-mail.

The accord “will make Russia rely more on China both economically and politically,” said Lin Boqiang, director of the Energy Economics Research Center at Xiamen University.

The Bank of Russia today cut its growth forecast for next year to zero, citing continuing sanctions and oil prices at $95/bbl. The ruble has depreciated to record levels.

‘Sustainable Basis’

“China is probably the only country in the world that has both the financial ability and the market capacity to consume Russia’s huge energy exports on a sustainable basis over a long period of time,” Lin said.

It gives Putin an opportunity to show Europe and the US that his country won’t be isolated over Ukraine, he said.

The two deals could account for almost 17% of China’s gas consumption by 2020, Gordon Kwan, a Hong Kong-based analyst at Nomura Holdings, wrote today in an e-mail.

Russia may start selling gas to China within four to six years as part of its agreement with CNPC, Alexey Miller, the CEO of Gazprom, told reporters in Beijing.

“Together we have carefully taken care of the tree of Russian-Chinese relations,” Xi Jinping said at a meeting with Putin at the economic forum. “Now fall has set in, it’s harvest time, it’s time to gather fruit.”

Australia Pressure

A second China-Russia agreement adds to pressure on liquefied natural gas suppliers, mainly in Australia where costs to build new plants are high, said Adrian Wood, a Sydney-based analyst at Macquarie Group.

“There is a general view out there that China is going to underwrite all these projects, that Chinese demand is insatiable,” Wood said. “We’ve never shared that view. This is going to certainly weigh on demand, and therefore there will be even more competition for customers.”

Putin called the earlier agreement between state-run Gazprom and its Chinese partners “epochal.”

CNPC also signed an initial agreement with Rosneft to acquire 10% of the Vankorneft business. Russia and China also are considering gas supplies from Russia’s Far East, Gazprom’s Miller said.

Under the agreement earlier this year, China will import 38 billion cubic meters/year of gas from Russia over three decades starting as soon as 2018.

Gas will account for more than 10% of China’s energy consumption by 2020, compared with 6% currently, according to the National Development and Reform Commission, China’s national economic planner.

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