ISSN 2330-717X

Doubts Rise On Russia-China Gas Deal – Analysis


By Michael Lelyveld


Ten months after agreeing to build a natural gas pipeline to eastern China, Russia is reportedly trying to shift deliveries to a cheaper western route.

Last May, Russian monopoly Gazprom signed a 30-year contract with state-owned China National Petroleum Corp. (CNPC) to build a major pipeline and supply gas from new fields under development in East Siberia.

The entire deal has been valued at U.S. $400 billion (2.4 trillion yuan).

But on March 18, Reuters quoted industry and banking sources as saying that Gazprom could postpone the U.S. $55-billion (341-billion yuan) “Power of Siberia” pipeline project, preferring to pump gas from existing fields through a shorter pipeline to Xinjiang instead.

Moscow has been pressing China to accept the western route through Russia’s remote Altai region to Xinjiang for nearly a decade, but Beijing has held out for an eastern project as a priority to bring gas to smoggy industrial areas and coastal cities that rely on coal-fired power.


Russia has not provided recent cost estimates for the mountainous Altai route, but last April, Kremlin chief of staff Sergei Ivanov argued it would be “less capital intensive,” since it would tap Siberian infrastructure and gas fields that are already developed.

Erica Downs, a senior analyst at the New York-based Eurasia Group, told Dow Jones Newswires in November that the Altai project could cost as little as U.S. $10 billion (61 billion yuan).

The 2,600-kilometer (1,615-mile) western route would be shorter for Russia but longer for China, which would have to build another 4,000-kilometer (2,485-mile) West-East line from Xinjiang to reach coastal markets.

The eastern Power of Siberia project includes some 4,000 kilometers of new pipeline on Russian territory, according to Gazprom. The vast region in East Siberia and Russia’s Far East has new resources but little infrastructure or development now.

Two years ago during a visit from President Xi Jinping, Russia bowed to China’s priority by pledging in a framework agreement to build the eastern route first for supplies of 38 billion cubic meters (1.3 trillion cubic feet) per year.

The contract signed last year called for gas to start flowing by 2019.

In November, Gazprom and CNPC also reached a preliminary accord for the Altai line, but without specifying a date for the project, despite a statement by President Vladimir Putin in September that it could be built faster than the eastern line to supply gas to China first.

Set in stone?

The report suggesting a postponement of the eastern project and a shift back to Russia’s preference for the western route has raised doubts about whether any of the plans are set in stone.

“Didn’t they agree on this in March 2013 during Xi Jinping’s first trip to Moscow as president?” asked Edward Chow, senior fellow for energy and national security at the Center for Strategic and International Studies in Washington. “So, did we just lose two years?”

“It was always clear that the Chinese would prefer the eastern route and the Russians preferred the western route,” said Chow. “Did all the progress they made in the last two years just evaporate and are they going back to square one?”

In response to the Reuters report, Gazprom CEO Alexei Miller issued a statement giving assurances that plans for the Power of Siberia project and “pre-development” of the 1.2-trillion cubic meter (42-trillion cubic foot) Chayandinskoye gas field remain on track.

“Operations at Chayanda and Power of Siberia are in full swing and will be completed right on time,” Miller said.

Gazprom hopes to sign a contract with China for deliveries from the western route on May 9, when President Xi is expected in Moscow for ceremonies marking the 70th anniversary of the end of World War II.

But sales terms have yet to be settled for the supplies of 30 billion cubic meters (1 trillion cubic feet) of gas per year through the Altai line.

Russian officials have been hedging their bets on whether the May target for a contract will be met.

“As a rule, the signing of contracts is not adapted to a specific date,” said Putin spokesman Dmitry Peskov, the Russian daily Vedomosti reported.

“Therefore if the contract terms are agreed upon, we cannot rule out its signing. If they are not, then talks will continue,” Peskov said.

If the Altai line is built, it would pump gas from the same arctic fields that supply Europe, furthering Russia’s long-term strategy to spur competition with Asia for its resources.

But while the western route would be shorter and cheaper for Russia, China has little need for a pipeline to Xinjiang, which is already a major gas producing region and a crossing point for supply lines from Central Asia.

Reason for uncertainty

Significant changes in both Russia and China since the $400-billion deal was signed give reason for uncertainty about both gas plans.

In Russia, the stakes for supplying gas to China have increased with financial pressures, brought on by the plunge in world oil prices and Western sanctions following the takeover of Crimea.

Government and central bank forecasts predict a 3-4 percent drop in Russia’s gross domestic product (GDP) this year.

Russia’s average oil price in the first quarter was 45 percent below last year’s average and less than half the average price for 2013, according to Finance Ministry figures.

Due to a relatively warm winter in Europe and the conflict in Ukraine, Russian gas exports last year fell 6.7 percent, the Energy Ministry said.

Capital outflow in the first two months of this year reached U.S. $24 billion (149 billion yuan), adding to the U.S. $151.5 billion (941 billion yuan) that fled the country in 2014, Interfax reported.

Russia’s revised 2015 budget calls for a deficit of 3.7 percent of GDP despite cuts in most programs, as Putin persists in pushing a military buildup.

Last month, Finance Minister Anton Siluanov warned that this year’s spending would leave just 2.6 trillion rubles (U.S. $45 billion, 280 billion yuan) in the country’s “rainy day” Reserve Fund.

Chow also noted that Russia has lost easy access to international financing for big projects because of Western sanctions.

Although Moscow expected a U.S. $25-billion (155-billion yuan) prepayment from China as part of the $400-billion gas deal, those funds have not materialized.

Changing conditions in China

In China, conditions have also changed, in part because of the country’s “new normal” economic track after GDP growth of 7.4 percent in 2014 slipped to a 24-year low.

The government remains committed to replacing more coal with renewables and natural gas, but gas consumption last year rose 8.9 percent, the slowest pace in 10 years and far less than forecast, according to CNPC.

And thanks in part to the drop in oil prices, Russia’s prices for gas in Europe are now lower than the presumed price negotiated with China under the $400-billion deal.

Prices were already headed down because Gazprom adjusts its European gas rates to reflect changes in oil prices with a six-to-nine-month time lag.

But prices also took a sharp dip in early March, when Gazprom abruptly changed its policy toward European customers that supply gas “in reverse flow” to Ukraine.

For the previous six months, Gazprom restricted its flows to contract minimums for European countries, hoping to discourage them from selling gas back to Ukraine at below- Russian rates.

When it suddenly abandoned the strategy on March 6, daily pipeline volumes jumped 58 percent, driving prices down as low as U.S. $240 (1,489 yuan) per thousand cubic meters, Interfax reported.

That was some 30 percent below average Russian gas prices for Europe last year and nearly 32 percent less than the reported starting price for China of U.S. $350 (2,171 yuan) per thousand cubic meters under the $400-billion deal.

Chow said the disparity may encourage China to renegotiate its prices. The anticipation of price drops may be a reason why Russia has yet to receive the prepayment that it hoped to get last year.

Russia’s push for the pipeline

Russia’s continued push to prioritize the western pipeline despite China’s resistance may add new doubts about what was previously agreed.

“Now, the deal that we thought was the more solid of the two that was announced last year is maybe not as solid as we thought it was,” Chow said.

Russia has also moved slowly to approve an intergovernmental agreement signed with China last October that would validate the eastern route contract.

The government submitted the accord to parliamentary State Duma for ratification only on March 31, the ITAR-TASS news agency said.

Recent reports may also raise questions about the pace of progress on the Power of Siberia pipeline, which is due to be completed in 2018.

Construction was officially launched last Sept. 1 at an event in Russia’s Sakha (Yakutia) region attended by Putin and Chinese Vice Premier Zhang Gaoli.

In mid-February, Interfax said construction of the pipeline “is continuing” in a report citing Gazprom’s press service, although details suggested the work is in a preliminary stage.

The pipeline route was being cleared and sites for line operations bases were being prepared, the report said.

On March 27, the news agency quoted a Gazprom official as saying that Russia’s pipeline construction company Stroytransgaz would lay only the first 70-80 kilometers (43-49 miles) of the pipeline sometime in 2015.

“More intensive work is (planned) in the second half of 2015 and subsequent years,” Gazprom Transgaz Tomsk’s general director, Anatoly Titov, said.

While the huge project in East Siberia’s wilderness may move slowly, the western pipeline through the Altai region may also prove problematic.

The mountain crossing may include construction at altitudes of up to 2,600 meters (8,530 feet) in a nature preserve area designated by UNESCO as a World Heritage Site, raising both engineering and environmental concerns.


Radio Free Asia’s mission is to provide accurate and timely news and information to Asian countries whose governments prohibit access to a free press. Content used with the permission of Radio Free Asia, 2025 M St. NW, Suite 300, Washington DC 20036.

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