via LobeLog

by Sara Vakhshouri

After almost a decade of negotiations, Moscow reached a 400 billion dollar energy deal with Beijing yesterday, allowing the Russian state-controlled Gazprom to export gas to China for 30 years.

The key agreement guarantees long-term market access for Russian gas in the Asian market, where Russia has historically had a negligible market share. The China National Petroleum Corporation (CNPC) will meanwhile receive discounted gas prices for the duration of the contract.

Yet the logistics are daunting. For Russian gas to actually arrive in China, Russia has to invest $55 billion in exploration and pipeline construction. For its part, China has to provide $20 billion for gas development and infrastructure. Ultimately, the gas will be transported to China through a pipeline in the Siberian gas field. The flow of gas to China is scheduled to start in 2018, and will gradually increase to 38 billion cubic meters (bcm) a year. The exported volume could be increase to 60 bcm a year.

There has been much speculation as to why the two countries finally agreed to the mega-deal after so many years of not being able to find common ground. Analysts have pointed to a Russian desire to counter the growing Western pressure it faces, to a China that’s now desperately seeking long-term access to clean and discounted energy.

The agreed gas prices have not been announced yet, but the pricing method is similar to the European price formula, which is tied to crude oil prices. Russia obviously would not want to sell its gas at prices that are lower than those it offers Europe, between $350-$380 per thousand cubic meters. But China would not agree to higher prices; this is a long-term deal, and with expected growth in North American shale gas production, markets generally expect a downward price trend.

Another reason China expects lower prices is that it is in the early stages of producing gas from its own shale reserves, particularly from the three basins of Sichuan, Yangtze Platform and Tarim.

In 2013, the Energy Information Agency (EIA) estimated that China possessed 1,115 trillion cubic feet (31 trillion cubic meters) of technically recoverable shale gas. That same year China produced 7.1 billion cubic feet (200 million cubic meters) of natural gas from shale formations. This puts China in the third place of shale gas producing countries after the US and Canada.
Russia, however, sees things differently. Although Russian gas prices in Europe are too low to be replicable with other alternatives, this deal still undermines broader Western attempts to isolate Russia’s economy. President Vladimir Putin knows very well that low gas prices to Europe make it a relatively unattractive destination, particularly for Liquefied Natural Gas (LNG) shipments. But American LNG cannot be shipped to Europe at the same prices Russia offers — here again, logistics is the main issue.

Iranian natural gas is also not an option for Europe at present. Iran’s low natural gas export capacity makes it impossible for Tehran to be able to compete with Moscow in this market.

All this explains Putin’s plan for the Asian market: securing market share and access in Asia for the long-term by offering low gas prices. Russia is preparing to compete with US supplies in Asia, a region that potentially could become a major market for US shale gas and condensate. Indeed, the 30-year gas export deal between Gazprom and CNPC not only ensures the security of demand for Russian gas, it also allows Russia to compete with the US by sending its gas to Asia via pipeline at a time when the prospects of LNG exports from this country do not look very promising.

This landmark deal will also help Russia recover from its budgetary issues and partial revenue loss from the European market in the short- and long-term. In other words, Russia’s geopolitical influence in Asia will increase at a time when, due to Moscow’s actions in Ukraine, Europe has lost its trust in Russia as a long-term and reliable energy supplier.

For the Chinese, promoting natural gas is a top priority for their economic and energy policy strategies. Securing long-term access to Russian discounted natural gas therefore occupies an important place in Beijing’s energy security plan. Access to natural gas transferred via pipeline not only offers price advantages in comparison to LNG imports, it also reduces Chinese dependency on international waters. This will significantly reduce the transportation risks of energy flow to this country.

Follow LobeLog on Twitter and like us on Facebook.