Russia, China sign $400bn gas deal

With tensions growing between China and the US, there are some old alliances being renewed and this is having major repercussions on the energy market.

It has taken 10 years to come together, but Russia and China have finally signed a 30-year gas deal which analysts reckon is worth more than $400 billion (€292 billion).

It's a crucial deal for prime minister Vladimir Putin, who wants to expand ties with the world's second biggest economy at a time when relations with the West are turning sour over the Ukraine situation.

The agreement was signed at a summit in Shanghai and is expected to deliver some 38 billion cubic metres of natural gas a year eastward to feed China’s growing demand for energy, with provision due to start around 2018. The main argument has been over price and China is thought to have been driving a hard bargain.

Right now there is one complete pipeline that runs across Russia’s Far East to the Chinese border, called “The Power of Siberia”, which was started in 2007, three years after Gazprom and China National Petroleum Corp signed their initial agreement in 2004.

Central to the talks was how to finance the cost of the pipeline, which could be as high as €22 billion. China is Russia’s largest single trading partner, with bilateral trade flows of €66 billion in 2013.

China has alliances across the region to ensure the provision of the energy needed to feed its expanding economy. Turkmenistan is currently China's largest foreign gas supplier, and last year it started importing piped natural gas from Burma.

“Gazprom is under increasing geopolitical and competitive pressure to diversify its market toward the East, while China’s gas market remains supply constrained as demand continues to surge,” energy analysts at IHS said in a statement.

“The final agreed price is believed to be closer to what Russia wanted than what China was initially prepared to pay. In exchange, the idea of a prepayment, similar to what was agreed in the Russia-China oil deals, was dropped. This higher price level reflects China’s willingness to pay more for cleaner fuel, consistent with its efforts on domestic gas price reform to accommodate rising supply costs,” they wrote.