After more than a decade of talks, Russia has secured the most important energy deal in its history. And it couldn’t have come at a better time…
Obama must have lobbed up a few air balls during his morning basketball workout when the news was announced.
Can you blame him?
At the eleventh hour, after yet another round of tense negotiations that threatened to curtail the deal for good, Russia finally managed to secure an unprecedented $400 billion deal to supply natural gas to China.
Russian President Vladimir Putin and Chinese President Xi Jinping met in China last week where a series of other bilateral agreements were signed.
However, the gas deal didn’t get the OK until after public statements were issued which proclaimed that there was a stalemate.
Then, as if Putin and Xi wanted to give Western nations the proverbial middle finger, they proudly announced that a contract was signed.
Here’s the breakdown…
The agreement will allow state-run gas giant OAO Gazprom (GAZP) to invest $55 billion to develop massive gas fields in eastern Siberia as well as to construct a $22 billion pipeline into Chinese territory.
The pipeline will enable Gazprom to transport as much as 1.34 tcf of gas per year to state-owned China National Petroleum Corp., which is about a quarter of China’s current consumption and about 10% of its projected demand come 2020.
For Gazprom, this deal would make up nearly 20% of its gas sales in Europe, which is its largest market.
Following the signing of the historic agreement, Putin called it an “epochal event”.
The 30-year agreement has essentially cemented the already rock-solid economic ties between the world’s largest energy producer and the world’s largest energy consumer.
China is expected to pay as much as $25 billion up front to begin the necessary infrastructure construction.
This comes as a welcome relief for Russia as discussions on this gas project began more than ten years ago.
The overarching issue had always been on price, which looked to be finally resolved.
Gazprom’s average price in Europe was $380.5 per thousand cubic meters last year. The price in this contract is slightly above $350, Interfax reported, citing an unidentified insider familiar with the negotiations.
At that price point, it’s a great deal for China National yet will still allow Gazprom to make money.
And they’re not done yet…
Once the pipeline project commences, the two countries will begin talks on a second pipeline to the west of the initial route.
As I alluded to earlier, this deal needed to get done.
According to Xizhou Zhou, director of China Energy at IHS Inc., a consultant, “if the Russia-China gas deal didn’t get signed this week, the window of opportunity would’ve been closing fast as other supply sources enter the market.”
In particular, nearby Australia could pose a threat as a number of LNG projects are slated to come onboard.
Canada is also on the radar, with the recent developments in the approval of LNG export facilities in British Columbia.
Chances are, China won’t limit themselves to just obtaining gas from Russia, which is expected to begin in 4 to 6 years. After all, they have a population of over 1.3 billion to provide power for.
And the Russians are fully aware of that.
However, to have successfully captured the lions’ share of China’s natural gas business, this deal will go a long way to proving to the rest of the world that Russia’s economy is not at the mercy of Western sanctions.
Upon the completion of the gas field and pipeline projects, China won’t be Russia’s only customer in Asia.
According to the Wall Street Journal, while much of the gas output will be sold to the Chinese, there will be plenty of cheap supply remaining which Gazprom plans to transport via pipeline to the Pacific coast near Vladivostok.
Upon reaching the docks at Vladivostok, the gas will be converted to LNG and then shipped to other Asian markets.
Of course, where does this leave America’s up-and-coming LNG export industry?
Well, without Chinese buying power it would make it much tougher for the economics to work. Oversupply would depress prices and companies would find it much harder to turn a profit.
American LNG just lost a huge buyer. The deal between China and Russia truly is a slap in the face indeed.