Russia's President Vladimir Putin (3rd L) and China's President Xi Jinping (3rd R) look on as GazpromCEO Alexei Miller (2nd L) and President of China National Petroleum Corporation (CNPC) and Chairman and President of PetroChina Zhou Jiping (2nd R) sign documents during a ceremony in Shanghai May 21, 2014.

Anticipated gas deal between Russia and China signed

China and Russia have signed a long awaited contract for Gazprom to supply natural gas to China.

The contract, worth £237bn, will see Russia’s energy giant Gazprom delivering natural gas to China’s National Petroleum Corporation, enabling the east-Asian superpower to facilitate the shift away from coal towards greener energy resources in a bid to address intensifying environmental issues.

The deal, vital for Russia seeking diversification of its customer base as the European Union has pledged to decrease its dependence on Russian resources in the wake of the crisis in Ukraine, includes construction of a new pipeline linking Siberian gas fields to China's main consumption centres near its coast. Russia will begin delivering from 2018, building up to the annual target of 38 billion cubic metres. 

After the signing by Gazprom and China Natural Petroleum Corporation (CNPC) officials, Russia's President Vladimir Putin, witnessing the ceremony together with his Chinese counterpart Xi Jinping, announced that Russia planned to invest $55bn in exploration and pipeline construction up to China. CNPC said it would build the Chinese section of the pipeline.

Financial details of the deal have not been disclosed. But industry insiders suggested China likely had the upper hand in the negotiations as they entered their final phase, aware of Putin's need for new customers as his isolation in Europe intensified.

"This is indeed a historic event for the gas sector of Russia and of the Soviet Union," Putin said after the ceremony. "This is the biggest contract in the history of the gas sector of the former USSR.

"I want to stress that there was hard work done on the expert level. Our Chinese friends are difficult, hard negotiators," he said, noting that negotiations went on until 4 am.

"Through mutual compromise we managed to reach not only acceptable, but rather satisfactory, terms on this contract for both sides. Both sides were in the end pleased by the compromise reached on price and other terms."

Industry estimates showed that the price of the agreement may have come in at around $350 (£207) per thousand cubic metres. The Western European average is $380.

Company sources said China offered to pay more than the approximately $9 per million British thermal units (mmBtu) it pays for Turkmenistan supplies, while the lowest offer by Russia was at about $9.67 per mmBtu.

Another potential sticking point has been whether China would pay a lump sum up front in order to fund considerable infrastructure costs.

Gazprom CEO Alexei Miller said that element of talks remained unresolved, but Putin said China would provide $20 billion for gas development and infrastructure and that the price formula was similar to the European price tied to the market value of oil and oil products.

Analysts said broader, political factors were likely to have been at play around the negotiating table.

"Given the EU sanctions that could potentially hit Russia, I don't think Gazprom is in a position to strike a very high price for its gas," said Gordon Kwan, head of Asian oil research at Nomura.

He added that CNPC would be driving a hard bargain in the wake of a corruption investigation that rocked the company last year and as Xi seeks to stamp out graft more broadly.

Shares in Gazprom rose almost two per cent after the deal was announced, but they retreated to be up 0.8 per cent at 1236 GMT.

Russia China gas deal infographic

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