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Russia signs 'breakthrough' energy deal with China

April 01, 2013
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Gazprom headquarters in Moscow
Gazprom headquarters in Moscow

Russia and China have finally agreed to sign a memorandum on natural gas supplies after many years of negotiating the terms of the deal, as both parties have overcome their disagreements over pricing and potential routes. The agreement means that China could become the largest importer of Russian gas, surpassing the current top importer, Germany, the Wall Street Journal reported.

The memorandum was signed by the two presidents Vladimir Putin and Xi Jinping in Moscow last week and also includes a number of other energy agreements, including doubling the current level of Russian oil supplies and granting China's state oil company a stake in Russian oil fields, the news source noted. Under the terms of the agreement, Rosneft, the world's biggest traded oil producer, will borrow $2 billion from China Development Bank Corp in a 25-year loan.

Xi Jinping, who was making his first foreign trip as leader, defined the memorandum as a "breakthrough." In turn, President Putin stated that the agreement would have "long-term, historic results."

Russia's Gazprom, which is the world's largest extractor of natural gas, stated that it was on the verge of closing a 30-year supply deal with China, with the final details expected to be settled by the end of the year. The deal would give the company a huge boost, as it is currently struggling in its biggest market, Europe, challenged by subdued demand and tough regulation.

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As part of the agreement, a new pipeline will be constructed along the so-called eastern route to carry natural gas supplies to China. Gazprom predicted that the the total cost of its so-called "eastern gas program" would reach about $50 billion. The memorandum with the Asian country foresees the delivery of 38 billion cubic meters of gas per year starting in 2018, with supplies set to increase in time, eventually reaching annual supply of 60 billion cubic meters, according to Gazprom chief executive Alexei Miller, quoted by the Wall Street Journal. By contrast, last year's total natural gas supply to Germany stood at 33 billion cubic meters.

The situation in the European energy market has apparently contributed to the successful negotiations between Russia and China. For nearly a decade the two countries failed to agree on prices, but as Gazprom's profit from Europe started to fall Russia seemed more open to price negotiations with China. Gazprom said that a final price will probably be fixed over the next few months. According to Miller, it is possible that China will pay for supplies in advance, which will allow Gazprom to offer a discount, the Wall Street Journal said.

Russia's biggest natural gas supplier announced last year that it would start looking into ways to increase its trade with Asian countries, as it faced harsher business conditions in Europe amid more stringent regulation in the European Union and an antitrust investigation launched by European watchdogs.

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