Russia's Gazprom Signs $400 Billion Gas Agreement with China's CNPC

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Researched by Industrial Info Resources (Sugar Land, Texas)--Russia and China signed a landmark deal to extend their relationship in energy, infrastructure and transport, including a $400 billion natural gas deal. Russian President Vladimir Putin and his Chinese counterpart, Xi Jinping, signed 49 agreements in Shanghai. After decade-long talks between two countries, Russia's OAO Gazprom (PINK:OGZPY) (Moscow, Russia) and China's state-owned energy company, CNPC (Shangai, China), signed the gas-shipping contract Wednesday in Shanghai.

The widely anticipated, 30-year natural gas deal will allow Gazprom to invest $55 billion to develop gas fields in eastern Siberia, Putin said. The deal still will take years to become reality. Gazprom Chief Executive Officer Alexey Miller said after the signing that the gas contract is linked to oil product prices.

"This is the largest-ever contract for Gazprom," Miller said. "Russia and China will start talks on a second pipeline to the west of the initial route."

China may make as much as $25 billion in advance payments under the contract to invest in the necessary infrastructure, said Russian Energy Minister Alexander Novak in Shangai.

The initial volume of gas to be exported, about 38 billion cubic meters a year, will be small compared with the amount currently exported to Europe. Even if capacity is later increased to more than 60 billion cubic meters, the volume of gas will still only be about one-third of what is currently exported to Europe. Gazprom's sales to Europe rose by 15% last year to 174.3 billion cubic meters--the highest since 2008.

The "Russia-China gas deal [is] unlikely to have much of an impact, as the Russians are going to use the contract to monetize Siberian gas, which remains untapped," said Trevor Sikorski, an analyst at research house Energy Aspects in London, in a research note to clients. "First exports [are] not expected until [the] end of [the] decade, given pipeline and field development that must be made first. [The deal] gives Russia some needed diversification of export markets."

The EU is accelerating plans to find alternative suppliers of gas and is trying to decrease its dependence of Russian gas, in reaction to fears that a pricing dispute involving Ukraine could lead to disruptions of gas supplies to Europe.

Ukraine is the main transit route for Russian gas, and supplies have been suspended in earlier disputes. Russia supplies 30% of the EU's gas, making it the largest provider. Gazprom has given Ukraine until the end of the month to settle arrears of about $3.5 billion, or move to advance payments for its gas.

For additional information, see May 7, 2014, article - G7 to Reduce Europe's Reliance on Russian Gas.

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