Russia inks oil deal with China; so those US sanctions are starting to pinch, eh?

Putin snubs Western sanctions in huge gas deal with China, reads the Reuters headline from Wednesday 21st May. Did anyone really expect Russia to stand around idle and allow the west to stem its growth? If this deal is anything to go by, we can expect Putin and the Russian government to sidestep trade restrictions deftly during the coming months. The US has voiced plans to impose trade or sectoral sanctions on Russia if it meddles with the Ukraine’s interim elections on May 25th. Russia has inked one significant long term deal with its ally on the UN Security Council, securing both nations’ energy and revenue for years to come.

Putin snubs Western sanctions in huge gas deal with China

SHANGHAI: China and Russia Wednesday signed a gas supply deal thought to be worth billions of dollars, securing a major source of cleaner fuel for the world’s top energy user and opening up a new market for Moscow as it risks losing European customers over the Ukraine crisis.

China's President Xi Jinping (2nd R) looks at Russia's President Vladimir Putin (2nd L) shaking hands with Gazprom CEO Alexei Miller (L) at an agreement signing ceremony in Shanghai on May 21, 2014. (AFP PHOTO / RIA-NOVOSTI / POOL ALEXEY DRUZHININ)

China’s President Xi Jinping (2nd R) looks at Russia’s President Vladimir Putin (2nd L) shaking hands with Gazprom CEO Alexei Miller (L) at an agreement signing ceremony in Shanghai on May 21, 2014. (AFP PHOTO / RIA-NOVOSTI / POOL ALEXEY DRUZHININ)

The long-awaited agreement is a political triumph for Russian President Vladimir Putin, who is courting partners in Asia as those in Europe and the United States seek to isolate him over Moscow’s annexation of the Crimean peninsula.

Commercially, much depends on the price and other terms of the contract, which has been more than a decade in the making. China had the upper hand as negotiations entered their final phase, aware of Putin’s faceoff with the West.

“This is the biggest contract in the history of the gas sector of the former USSR,” Putin said after the agreement was signed in Shanghai between state-controlled entities Gazprom and China National Petroleum Corp.

“Our Chinese friends are difficult, hard negotiators,” he said, noting that talks went on until 4 a.m.

“Through mutual compromise we managed to reach not only acceptable, but rather satisfactory, terms on this contract for both sides.”

Putin and his Chinese counterpart Xi Jinping applauded as they witnessed the deal being signed, just hours before the Russian leader was due to leave Shanghai at the end of a two-day visit.

The deal came ahead of a major economic summit in the northern Russian city of St. Petersburg, starting Thursday. Around a dozen chief executives and chairmen of major U.S. and European corporations have withdrawn from the forum over the Ukraine crisis.

Putin loyalist and senior parliamentarian Alexey Pushkov, who was included on a U.S. list of individuals sanctioned in the wake of the crisis in Ukraine, said the gas deal showed Russia could not be isolated.

“B. Obama should abandon the policy of isolating Russia: It will not work,” he tweeted, referring to U.S. President Barack Obama, who has pushed for greater Western punishment of Russia.

Gazprom CEO Alexey Miller declined to disclose the price at which the deal was struck, but sources at the companies involved said Gazprom refused to go below $350 per thousand cubic meters.

That compares to a price range of $350-$380 that most European utilities pay under discounted long-term contracts signed in the last two years. Putin said the formula was similar to the European price tied to the market value of oil and oil products.

Crucially for China, the implied price is below the Asian cost of importing liquefied natural gas, an alternative energy source that it is currently developing.

Another potential sticking point in talks was whether China would pay a lump sum up front to fund considerable infrastructure costs.

According to Putin, China will provide $20 billion for gas development and infrastructure, but Miller said the two sides were still in talks over any advance.

The gas will be transported along a new pipeline linking Siberian gas fields to China’s main consumption centers near its coast. Russia will begin delivering from 2018, building up gradually to 38 billion cubic meters a year, officials said.

Russia plans to invest $55 billion in exploration and pipeline construction up to China, and CNPC said it would build the Chinese section of the pipeline.

The contract does not necessarily mean that Russia is giving up on Europe. Last year, Gazprom supplied Western Europe and Turkey with over 160 bcm of gas, dwarfing intended deliveries to China. Meanwhile, European consumers could not easily switch from Russian gas, even if they wanted to.

Beyond supplying China with gas via a pipeline, the deal opens up an opportunity for Gazprom to become a bigger player in the booming Asian LNG market, a sector it has so far not been involved in on a major scale.

Gazprom is planning to build a new LNG plant on the Russian Pacific coast near Vladivostok, but has so far lacked the infrastructure to supply the facility with the amount of gas necessary to meet regional demand.

The new pipeline would change this, ideally positioning Gazprom’s Vladivostok terminal close to the leading LNG buyers of Japan and South Korea as well as the rising market on China’s eastern coast.

Gordon Kwan, head of Asian oil research at Nomura, said that although details of the agreement were sketchy, they were likely to have been favorable to China.

“Given the EU sanctions that could potentially hit Russia, I don’t think Gazprom is in a position to strike a very high price,” he said.

He added that CNPC would be driving a hard bargain in the wake of a corruption investigation that rocked the company last year, as Xi seeks to stamp out broader graft.

Shares in Gazprom rose by nearly 2 percent after the deal was announced, and were up 1.3 percent at 13:20 GMT.

 A version of this article appeared in the print edition of The Daily Star on May 22, 2014, on page 1.

Source: The Daily Star Lebanon



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