The Russia-China Gas Deal: A $400 Billion Mirage?

The Russia-China Gas Deal: A $400 Billion Mirage?

No business agreement in recent times has generated as much excitement, and as much hyperbole, as the announced deal that Russia would supply China with 38 billion cubic meters (bcm) of gas annually for a thirty-year period. The $400-billion deal has been called a victory for Russia, a victory for China and even evidence of a shift in either energy markets, or geopolitics or both. Sadly, the deal is none of these things.

First, let’s talk about the commercial elements of the deal. The reality is that China has always had the upper hand because East Siberian gas can only be developed with China as a customer. For years, pundits have said that China was not willing to pay “European” prices to Russia. This is hardly true: China is paying “European” prices to Central Asia, and it pays more than that to Qatar and other suppliers of liquefied natural gas (LNG). The difference is that China had to compete for those supplies; absent competition in East Siberia, China had the upper hand.




We do not know the full details of the deal yet, nor do we know whether all the issues have been resolved—after all, the two sides have long stressed progress while downplaying their outstanding points. Even so, the rumored value ($400 billion over thirty years) equates to a gas price of around $10 per million British thermal units. Given the costs announced so far, this project will yield a subpar return for Gazprom under today’s assumptions—maybe high single digits or low double digits. This will not be Gazprom’s most profitable endeavor.

It does, however, score it a major political point. Gazprom’s inability to close this deal has frustrated the Kremlin. Together with Gazprom’s marketing strategy in Europe, which many criticized, the company’s privileged position has come under attack. The most visible crack was the decision last year to allow other Russian companies to export LNG. Still, the Kremlin is keen to avoid competition that could lower gas prices overseas. Until last year, this meant Europe. With this pipeline, Gazprom’s writ is enlarged, as are the complications from a liberalized approach to gas exports.

For Europe, this deal is hardly material. Gazprom is diversifying its markets, but this is a truism: any deal to sell gas outside Europe does that. Gazprom exported about 162 bcm to Europe in 2013 and about 59 bcm to countries of the Commonwealth of Independent States. Russia has a long way to go before it can look at Europe and Asia in the same way—especially given that much of the infrastructure to Europe is built, and the upside from additional Russian gas in the east is unclear at this point. Moreover, the gas to be exported to China is far away from Europe, and so there is no way to say that it will be “diverted” to Asia. In fact, for years, Russia has wanted a Western route to China, which would allow Russia to arbitrage between east and west. But the Chinese have no need for additional gas in that part of the country, so that route has stalled.

For China, the volumes are also important but not transformational. The 38 bcm that Russia will supply China might make up 10 to 15 percent of China’s total gas supply in the early 2020s. (Central Asia will be supplying China a similar amount of gas by then.) China developed a well-diversified portfolio of gas supply, one that relies on domestic production, pipeline imports from various sources and LNG from nearby and far away. (The Chinese, however, have been noticeably absent from contracting to buy LNG directly from the United States). Any deal that strengthens China’s sense of security is probably good news, and especially any deal that enables the development of gas that would otherwise have stayed in the ground.

What about the geopolitical dimensions of this deal? First, let us put things in perspective. The Associated Press, for example, wrote that, “The contract is worth a total of $400 billion, . . . That figure is greater than the GDP of South Africa.” Of course, this $400 billion number represents an estimate of cumulative gross revenues over a thirty-year period, unlike the GDP of South Africa, which represents value added (revenues minus costs) for a single year. This is like comparing an apple with an orchard. If we divide $400 billion by 30, we come up with a more sensible number: $13.3 billion in annual revenues.

This is a lot of money, but in 2013, Russia exported about $523 billion worth of goods, and its gas exports were $67.2 billion. Clearly, $13.3 billion in annual revenues is minor in the grand scheme of things. In fact, Russia would gain more from a $5 per barrel rise in the price of oil than it does from this gas deal. (People often forget that gas makes up just 13 percent of Russia’s export revenues).

Click link for remainder of article pages.


An interesting read to say the least. From the outset it looks like china was able to take Russia for a ride in certain areas, including pricing. It appears Russia may have placed all of their eggs into the one China basket. When China secures its own energy resources for self sufficiency it makes one wonder what will happen to Russia. This is nothing but short term positioning for China and every thing I see from the Russian side is long term strategy for them. The 2 are not compatible.

Some of the other issues raised are pretty interesting as well...

I think this deal was more symbolic of them going around the dollar, if it wasn't for that we wouldn't even be talking about this. It was strategic for the Russians to undermine the US, even if they lose money on the deal.

Of course China took Russia for a ride, Russian knows the EU is moving away from Russian gas and oil as soon as they can secure Qatari and other neighbouring European countries supplies

The problem is is the China deal only secures 25% of the deals it hold with the EU, and that 25% is likely to fall due to China's slumping industrial demands which is reliant on western consumer demand

Instead of taking from the hand that feeds her, Russia is now taking far less from a fellow feeder

It's not looking good for Russia at all tbh

Not only that but the sanctions remaining in place for as long as she illegally occupies Crimea is bleeding her dry drip by drip, Russia is well and truly in the brown stuff for her aggressive actions and tantrums in Ukraine

originally posted by: jaws1975
I think this deal was more symbolic of them going around the dollar, if it wasn't for that we wouldn't even be talking about this. It was strategic for the Russians to undermine the US, even if they lose money on the deal.

True

But it was more of a tantrum that they will end up regretting and no doubt can already feel the storm brewing of in the horizon

It's a one side perspective for sure. The article may have plenty of truth mixed in but it's the perception that's incorrect. It's the problem with a lot of ethnocentric, policentrics. When you get stuck within your own viewpoint so closely and are an slew isn't enough writer you can be considered news or factual op ed.

Any valid argument must include the whole picture first of all. You can't write a real truthful piece by setting a nationalist point of view. Then it's just state propaganda.

There was a time when people were more educated in philosophy and ethics so it was easier to understand what's propaganda and what's not. This piece is propaganda.

The entire global economy is very reliant on each part unfortunately. Russia supplies fossil fuel, and space tech. Both good things for china. Russia to this day has much of the worlds solid booster tech for satellites. That's going to change quick in the us but for the developing world Russia has serious supplies to fill needs.

The Us is reliant in china more than china is reliant on the us. Simply because of the need to uphold the comfort of the public is very important for democracy or elected officials. China doesn't care nearly as much what their peoples comfort levels are. If Americans stop buying goods creating their jobs and they can't find a replacement market out come the funeral pyres.

Strategically militarily there is giant stalemate and has been since the creation of mass killing weapons. Only proxi wars get fought to avoid bloodshed on the soil of the super powers. But if the truce is broken the outcome of an all out war between china/Russia/alliance vs Europe/us is a mass extinction event.

There would be a mass extinction event. Nobody would win. The us does not have enough financial or military might to go up against Russia. Which is clearly Russia/china.

This pipeline deal is one of many Russia china pipeline deals. The only reason it was made such a large deal of was because of the Ukraine crisis.

It is a crisis. A big one. We should stay out, get NATO out, trade with Russia normalize relations and use economics (not sanctions) to help the situation. You now have a ukraine who's best friends are big tough guys so they are talking a big game to get the loans. If they didn't have the big tough bullies behind them they would be forced to handle their problem on their own without instigating anything worse.

The loans ukraine is looking to get from the IMF are just as bad for the country if not worse than anything the Russians were going to do. What's the IMF success rate in war torn countries?

The whole world posture thing needs to be stopped. Eventually Russia, China, US, or Europe will have A major economic isolation problem and their only move will be to drag their allies into a devastating world war.

In some ways we need to think of the global economy as a way to get rid of the aggressive us against them mentality. Or else someone will fall get desperate and prob have enough hardware to do big damage to the entire planet. And that's just selfish.

It may have been based on China having a land route for the gas as the transportation by sea could be blocked is say the west wants to contain them .Could be a hedge against that .

That's a very closed perspective of the situation. First of the ukraine has plenty of their own problems. Russia used the ukraine civil problems/massive government corruption to get a strategic naval bass. Crimea was once part of Russia.
I would say it's more just ukraine corrupt government willing to make NATO IMF deals to pay off their gross mismanagement of the country. Russia wants more influence In ukraine for the oil and gas pipelines to Europe. It's like Israel and the us or the us and Egypt etc.

China Russia is a no brainer folks. Point at map. Point to Russia. Point to china. They are neighbors with common markets and major strategic partnerships. How does any one know why the whole deal was? What is the overlying strategy of joint military exercises and energy sharing? It's an obvious relationship not china waiting to pounce on Russia. We will get pounced before that happens.
a reply to: TritonTaranis

originally posted by: Luthierbrown
That's a very closed perspective of the situation. First of the ukraine has plenty of their own problems. Russia used the ukraine civil problems/massive government corruption to get a strategic naval bass. Crimea was once part of Russia.
I would say it's more just ukraine corrupt government willing to make NATO IMF deals to pay off their gross mismanagement of the country. Russia wants more influence In ukraine for the oil and gas pipelines to Europe. It's like Israel and the us or the us and Egypt etc.

China Russia is a no brainer folks. Point at map. Point to Russia. Point to china. They are neighbors with common markets and major strategic partnerships. How does any one know why the whole deal was? What is the overlying strategy of joint military exercises and energy sharing? It's an obvious relationship not china waiting to pounce on Russia. We will get pounced before that happens.
a reply to: TritonTaranis

It not an obvious relationship at all tbh

It's grabbing at the creepers while falling deal... China knows Russia is in the snip... and Russia is desperate as snip

China knows it can secure a peanuts deal

Russia has no leverage in this deal what so ever, it's like trying to make a deal with someone who knows if you don't sell the item you ain't eating tonight lol

Its a we're going bust so let's have a 90% of sale

Which is why the EU would love to know the ons and outs of the deal, they could also request a renegotiate there own deals for peanuts too

You do know it's not the first deal right? They have been trading for years? Building pipelines. Now doing major joint operations? No sure you have a grasp on the history here. a reply to: TritonTaranis

Ps Russia asked for much more than the going rate. Twice what they offer Europe va reply to: TritonTaranis

originally posted by: Luthierbrown
That's a very closed perspective of the situation. First of the ukraine has plenty of their own problems. Russia used the ukraine civil problems/massive government corruption to get a strategic naval bass. Crimea was once part of Russia.

I would say it's more just ukraine corrupt government willing to make NATO IMF deals to pay off their gross mismanagement of the country. Russia wants more influence In ukraine for the oil and gas pipelines to Europe. It's like Israel and the us or the us and Egypt etc.



China Russia is a no brainer folks. Point at map. Point to Russia. Point to china. They are neighbors with common markets and major strategic partnerships. How does any one know why the whole deal was? What is the overlying strategy of joint military exercises and energy sharing? It's an obvious relationship not china waiting to pounce on Russia. We will get pounced before that happens.

a reply to: TritonTaranis

Except the corruption was under the pro-Russian government. It was the brand new government put in place to fix the corruption that aligned with NATO. Russia backed the corrupt old-guard, and had a farce of an election that they mistakenly admitted to being a sham on their own website by posting the actual poll numbers and not the fake numbers they had been talking about.

originally posted by: Luthierbrown
Ps Russia asked for much more than the going rate. Twice what they offer Europe va reply to: TritonTaranis

You need to research your claim some more as its completely off base and without merit. What Russia wanted and what China paid is not even close. China got away with about $10.00 where as Russia was wanting $14.00 / $15.00 to cover losses and to turn a profit.

We know this because Russia complained about it and its one of the main reasons Putin didn't sign the deal the first day he was in China. This deal has been in the works for a loooong time and even now we don't know all of the details. The details we do have are not what Russia was wanting. Once can assume that remainder will most likely be more of the same.

originally posted by: OccamsRazor04

originally posted by: Luthierbrown
That's a very closed perspective of the situation. First of the ukraine has plenty of their own problems. Russia used the ukraine civil problems/massive government corruption to get a strategic naval bass. Crimea was once part of Russia.

I would say it's more just ukraine corrupt government willing to make NATO IMF deals to pay off their gross mismanagement of the country. Russia wants more influence In ukraine for the oil and gas pipelines to Europe. It's like Israel and the us or the us and Egypt etc.



China Russia is a no brainer folks. Point at map. Point to Russia. Point to china. They are neighbors with common markets and major strategic partnerships. How does any one know why the whole deal was? What is the overlying strategy of joint military exercises and energy sharing? It's an obvious relationship not china waiting to pounce on Russia. We will get pounced before that happens.

a reply to: TritonTaranis

Except the corruption was under the pro-Russian government. It was the brand new government put in place to fix the corruption that aligned with NATO. Russia backed the corrupt old-guard, and had a farce of an election that they mistakenly admitted to being a sham on their own website by posting the actual poll numbers and not the fake numbers they had been talking about.

The corruption in ukraine is widespread and much deeper than the Russian influence. It has been going on for years. The opposing party is just as corrupt. The new oligarch president is just as corrupt. I know this may be a new issue for some of you but, the corruption in ukraine and the civil unrest is not Russia's fault. They play a part it in but there are plenty of Ukrainian problems that are from the country itself. It's a big diverse country run by oligarchs some being extreme nazi right wingers.

originally posted by: Xcathdra

originally posted by: Luthierbrown
Ps Russia asked for much more than the going rate. Twice what they offer Europe va reply to: TritonTaranis

You need to research your claim some more as its completely off base and without merit. What Russia wanted and what China paid is not even close. China got away with about $10.00 where as Russia was wanting $14.00 / $15.00 to cover losses and to turn a profit.

We know this because Russia complained about it and its one of the main reasons Putin didn't sign the deal the first day he was in China. This deal has been in the works for a loooong time and even now we don't know all of the details. The details we do have are not what Russia was wanting. Once can assume that remainder will most likely be more of the same.

Oh it's not me who needs to do there research. How much do they offer Europe? Nobody has a $15 price so why would he Chinese pay that? Have you heard of negotiaitions? You start hi and meet somewhere between. Russia will do fine on this deal they are tetung the going rate and what ever you made up about profits is also incorrect.

I seriously doubt anybody knows what the actual deal is for. Russia and China have been steadily making energy deals for over a decade. They collaborate with rocket tech, space tech, millitary tech, military operations, currency, etc.

I think the ethnocentric natiolists need their propaganda. This piece and many of the comments are of an agenda. The truth can only be seen with wisdom, and the ability to look at things through an emic and etic perspective. You can keep trying to make stuff up but it won't make it true even if other ethnocentric policentrics believe it.

originally posted by: Xcathdra

originally posted by: Luthierbrown
Ps Russia asked for much more than the going rate. Twice what they offer Europe va reply to: TritonTaranis

You need to research your claim some more as its completely off base and without merit. What Russia wanted and what China paid is not even close. China got away with about $10.00 where as Russia was wanting $14.00 / $15.00 to cover losses and to turn a profit.

We know this because Russia complained about it and its one of the main reasons Putin didn't sign the deal the first day he was in China. This deal has been in the works for a loooong time and even now we don't know all of the details. The details we do have are not what Russia was wanting. Once can assume that remainder will most likely be more of the same.

Let's get an unbiased perspective.

The precise gas price agreed between Beijing and Moscow is currently secret. Well-informed insiders, examining the scale of the promised exports, and the headline size of the deal, suggest a range of $350-$370 per thousand cubic meters. If true, this works well for both sides. Russia sells gas to Belarus for about $180 while Ukraine, until recently, was paying $268. So $350, while less than most West European countries pay, isn’t bad from a Russian perspective. Yet it’s still less than it costs China to import LNG from Qatar and elsewhere — and with much less geo-strategic risk.