China, Russia sign $400 billion gas deal

Russia's President Vladimir Putin, centre right, and China's President Xi Jinping, centre left, walk to open joint naval exercises, in Shanghai, China. Photo / AP

China signed a long-awaited deal for Russian natural gas Wednesday, giving China a new energy source and Russia a diplomatic boost in the face of sanctions and condemnation for its aggressive actions in Ukraine.

Announced after meetings between Chinese President Xi Jinping and Russian President Vladmir Putin at an Asia security conference, the 30-year deal is worth an estimated $400 billion, according to comments in Russian media by Gasprom CEO Alexei Miller.

On a symbolic level, the deal also provided China and Russia a chance to reaffirm their strategic alliance against the United States, their shared global rival.

U.S. Treasury Secretary Jacob Lew appealed to China to avoid action that might hurt recent Western sanctions against Russia. But China's booming economy has brought with it a ravenously growing need for energy, especially clean alternatives given its current pollution struggles and reliance on coal.

The agreement allows Russia to diversify its gas exports just as Europe is trying to taper off its consumption of Russian gas in response to the country's role in the Ukrainian crisis.

"This is Gazprom's biggest contract. We don't have a contract like this with any other company," Miller said at the meeting in Shanghai, according to Russia's Interfax news agency.

Putin said that the implementation of the deal would start "tomorrow."

The final price for gas negotiated for the deal was not announced and it is unclear, given the vague nature of the announcement, whether there are other aspects to the deal still to be worked out.

Analysts at IHS Energy - who have tracked the progress of the deal, almost 10 years in the making - said in a written analysis they believe the final agreed price was "closer to what Russia wanted than what China was initially prepared to pay."

The long-anticipated agreement met with approval and pride from many Russians, in an atmosphere of rising nationalism and anti-Western rhetoric over the crisis in Ukraine.

One caller to the Echo of Moscow radio station declared the gas deal "another victory for Putin because he managed to sell gas for European prices," while another listener suggested the new level in Russian-Chinese cooperation must be a "nightmare for America."

But the actual price tag on the 30-year contract remained a mystery hours after the signing on Wednesday, raising suspicion for some of the Kremlin's skeptics that it had dropped the price significantly for China in a desperate maneuver to shore up a steady cash flow for Russian energy giant Gazprom, amid sinking revenue and Western sanctions.

Miller, the Gazprom CEO, had earlier called the price a "commercial secret." And Putin, without naming an amount, told journalists in Shanghai on Wednesday that the price was "pegged to the price of oil and petroleum products," the Interfax news agency reported.

Mikhail Krutikhin, an energy and oil analyst at Rusenergy, a Moscow think tank, said the reason for the secrecy was obvious: "There's something fishy in the contract," he said.

Unnamed individuals quoted in Russian media approximated the price at $350 per 1,000 cubic meters of gas, based on earlier projections of a long-term price tag of $400 billion.

But if the actual sale was worth less than that, it would mean Russia was desperate enough for cash that it is willing to subsidize China's energy costs, Krutikhin said. Gazprom is already losing out to American and European competition; Europe's gas demands have been stagnant; and the threat of mounting Western sanctions over Ukraine are "making Mr. Putin jittery," he added.

Russian officials on Wednesday also hinted at a possible "prepayment" totaling $25 billion, raising further questions of whether a prepayment would amount to emergency assistance.

The construction of the pipelines and other infrastructure alone are expected to top $70 billion, Krutikhin said - an amount that a beleaguered Gazprom can't afford on its own. Russia expects China to pick up part of the bill.

-Washington Post