It had been more than a decade in the making, but on May 21, Russia and China finally agreed to a landmark 30-year, $400 billion natural gas deal that some say cements Russia’s latent “pivot to the East.”
Signed during Russian President Vladimir Putin’s most recent trip to China, the agreement effectively gives Moscow and Russian natural gas giant Gazprom a growing market for the country’s leading export and will help quench China’s expanding demands for cleaner energy.
According to Colorado-based global information company IHS, the deal will see Gazprom deliver 38 billion cubic meters annually, initially through Russia’s eastern Siberian “Power of Siberia” pipeline to China’s Heilongjiang province, starting in 2018.
In reality, the exact details of the contract between Gazprom and China National Petroleum Corp. (CNPC) remain vague. With at least four years and thousands of kilometers of pipeline required before any gas is actually flowing, questions also remain as to how the gas will be transported.
So far, neither Gazprom nor CNPC has released the full details of their accord. And it is precisely that vagueness, along with the timing of the agreement, that has given rise to widespread speculation over what motivated the two parties.
On the one hand, the agreement is likely to bring Russia and China closer together—both economically and politically—as counterforces to the United States and the European Union. And while it is tempting to see the China deal as a reactive geopolitical strategy, especially given the recent sanctions on Russia following the annexation of Ukraine, experts say that economics played a much larger role.
“When you boil it down, Russia needs the money,” said David Dusseault, a senior market analyst at Gasum, Finland’s largest natural gas supplier and a major importer of Gazprom’s natural gas.
“Gazprom is hard-wired to the Russian budget, and you have a huge amount of resources, you have a huge market,” he said. “So they needed to get the gas in, because if they don’t, U.S. gas or western Canadian gas or even Australian gas could take that from the Russians. This is purely a commercial deal that the Russians had to sign.”
Dr. Tim Boersma, an Energy Security Initiative fellow at the Brookings Institute, agrees, saying, “Deals like this are not made overnight.
“Negotiations had been going on for a long time,” he added. “It could be that the situation in Ukraine added to a context in which both sides could now reach an agreement, though. But particularly Russia needed this.”
Dr. Corey Johnson, a professor of geography at the University of North Carolina at Greensboro, also points out that the deal was genuinely economic in nature.
“East Asia is a growth market, and if you’re a business such as Gazprom, which obviously has close ties to the Kremlin, you see this growing market, and you see the potential to make money off of that,” Johnson said. “So you’re going to try to exploit that. You’re also going to try to hedge against other actors, other players coming in and stealing the thunder, or getting into the market before you get in there.”
Some of the Western media, however, paint a more black and white picture where the events in Ukraine led directly to the accord between the two nations.
Jane Perlez of The New York Times, for example, wrote that “the Ukrainian crisis forced Russia’s president, Vladimir V. Putin, to urgently seek an alternative to Europe.” Likewise, Carrie Gracie of BBC News said that prior to the deal’s signing, “the government in Beijing is well aware that after the chill in relations with Europe that followed the Ukraine crisis, Moscow needs to stop depending on the West for 80 percent of its energy sales.”
Boersma, though, does not say the situation in Ukraine or U.S.-EU sanctions forced Putin’s hand.
“Proponents of the sanctions will tell you they [sanctions] are very influential, but I have my doubts,” he said. “They may have added to the context in which China and Russia reached an agreement, but I think the sanctions were never strong enough to actually hurt Russia, and Europe logically was never willing to go all the way.”
Johnson also does not see Ukraine as the sole motivating factor for the Russia-China deal.
“This is a deal that’s been a long time in the making,” Johnson said. “My hunch would be that this [the war in Ukraine] may have sped up the timetable, but it was bound to happen at some point.”
For years, the EU has been saying that it would reduce its reliance on Russian energy, a stance that has gained prominence following Russia’s recent military exploits in Ukraine. Finland and Estonia, for example, are in the midst of discussions over who will take responsibility for a proposed underwater natural gas pipeline.
Boersma, however, doubts whether the Ukrainian crisis or Europe’s public stance toward Russian energy would deter Gazprom from continuing its massive exports flowing to the West.
“Russia will also remain an important supplier to Europe. The rhetoric today about moving away should be taken with a grain of salt and will not happen any time soon, if at all,” he said.
And while East Asia has become a growth market, it is unlikely that the region will soon supplant Europe as Russia’s main natural gas export destination, especially given the European-centered pipeline infrastructure and pricing already in place.
“What’s been set up in the case of Eurasia is a western Eurasian-Europe gas complex and now increasingly this eastern Eurasian gas complex,” Johnson said. “So Russia is well aware of this, and this is why Russia’s aware that they’ll continue to sell gas to Europe for a very long time because of that material reality.”
Indeed, a report written by IHS Cera’s Matthew Sagers, Thane Gustafson and Shankari Srinivasan, which appeared in The Wall Street Journal, says that in 2013 Russia had increased gas deliveries to Europe (excluding the Baltic states) by 167 billion cubic meters, “up 15 percent, setting an all-time record.”
The China deal, then, should have little effect on current supply chains flowing to the West.
“Russian supplies that will eventually head east do not take away from supplies in western Siberia,” Dusseault said. “So Russia has an ability almost like scales, to send production from Eastern fields to Eastern markets and from the Western fields to the West.”
The bottom line is that the deal between Gazprom and CNPC will not take effect until at least 2018. Yet its global economic implications precede the actual flow of gas.
“If we think that we’re moving towards a much more globalized energy world where at one point you’re going to have a world price for [liquefied natural gas] or for natural gas, then we really have to think about the major destinations for gas being in Asia, not in Europe,” Dusseault said.
Boersma agrees. “Both Korea and Japan are already major natural gas markets, and most studies suggest that countries like China and India will join them,” he said. “A part of their portfolio is likely to come from Russia. Assuming deliveries to China are successful, then in the future more gas supplies to China and other Asian countries may be expected.”