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Publish Date : 27-May-2014

Russia's Gazprom and China National Petroleum Corp (CNPC) signed a $400 billion gas deal on May 21.

The gas deal had been in the making for a decade as Russia and China negotiated over price and other terms of the contract, including the route of the pipeline that would carry the gas from Siberian fields to China. The final price is unclear, but it is believed that China agreed to a large upfront payment to cover initial costs. The projected delivery date is 2018, with a ultimate capacity of 38 billion cubic meters (bcm).

Access to the Chinese energy market is at the core of Russia’s "pivot to Asia." Europe was Russia's primary market, but European energy consumption is stagnant and the EU no longer appears willing to bear the political costs of its dependence on Russian gas, due to recent events.

Diversification of the energy mix is the EU's priority. Trans-Anatolian and Trans-Adriatic pipelines will bring in gas from the Caspian basin to Europe, bypassing Russia. The EU’s diversification efforts are being aided by the shale revolution in the US, which has given Europeans new options.

Most of the cheap American coal is now headed to Europe. Liquefied natural gas (LNG) imports from the US are an expensive option for the EU in comparison to piped gas.

The conclusion of the Transatlantic Trade and Investment Partnership (TTIP) will also boost the US-EU energy trade. Given the deteriorating position in Europe, access to Chinese market has become even more critical for Russia.

China stands to reap economic gains from the gas deal, as it has made natural gas its top priority in its Twelfth 5-Year Plan (2011-2015). Chinese demand for gas is growing fast, projected to reach 230 bcm per year. China has unconventional gas reserves but they are not recoverable in the near future. Reliable gas imports are critical.

China is weary of LNG imports, due to the high cost, but because of Beijing's desire to avoid too much on the US-dominated sea-lanes as well as the politically unstable suppliers in the Middle East and Central Asia. Therefore, Russian gas is the best option for China.

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