Article / 22 May 2014 at 12:44 GMT

And the winner of the Russia-China gas contract is...

Russia oil and gas expert
United Kingdom
  • Russia signs multi-billion dollar gas deal with China after years of negotiation
  • Gazprom's poor hand sees China earn a host of concessions
  •  Rosneft/Gazprom rift widens as China eyes government stake in oil major

Russia and China have just signed a multi-billion dollar, 30-year gas contract. It took some years and a round-the-clock 24 hours vigil of hard talks before the contract was finalised at around 4 am Shanghai time. 

Under such circumstances, it is hard to see how Gazprom could have secured a good deal under such pressure. Gazprom’s loss nevertheless might have been Rosneft’s gain. Rosneft will emerge not just as an oil major but also as a large exporter of the Russian gas and LNG.

The red-eye gas deal

The final details were agreed at 3.30 am on May 21, and included the base gas price (reportedly above USD 350/mcm or USD 10/MBTU) and an option for CNPC to make a USD 25 billion prepayment.

Other terms of the contract were agreed in 2013: an oil-linked formula, a 30-year term, and up to 38 billion cubic meters/year deliveries starting in 2018. The value of the contract was set at an eye-watering USD 400 billion.

Total investments into field developments and pipeline contraction will be USD 55 billion on the Russian side and USD 22 billion on the Chinese side, news agency Interfax reported President Putin as saying. The final intergovernmental agreement on the gas deliveries detail will be signed before end 2014.

The base price for the gas, which will then be adjusted for the change in the reference oil product basket, will remain a commercial secret. It was reported earlier that a prepayment option was directly linked to the level of the gas price. It is unclear, however, how if it was reflected in the final contract.

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Negotiations continued into the early hours Wednesday in Shanghai between the Russian and Chinese delegations before a deal on gas was finally struck at 3.30 am. Photo: chuyu \ Thinkstock

Gas deal extras: how much family silver will have to go

Given the strong negotiating position of the Chinese side and the haste with which the Russians hoped to conclude a deal, quite a few sweeteners must have been on offer to make the gas deal happen.

  • The Russian government promised to cancel the production tax (MET) for the gas fields which will supply the Chinese gas pipeline.

  • Gazprom has offered CNPC a 49 percent stake in the Vladivostok liquefaction plant (10 million ton project capacity, first train expected by 2020).

  • CNPC has an option of prepaying for the Russian gas and, one assumes, getting a further discount on the gas price.

  • The Russian government is open to CNPC's interest in a government stake in Rosneft (19.5 percent on offer).

All these concessions do not look too generous, especially if Gazprom does manage to make some money on the underlying gas contract. But there is another angle to the story: how it all falls in favour of Rosneft.

Rosneft: the emerging gas major

In my view, China is angling to have Rosneft as one of the main partners in the gas sector. The oil company has already planted the idea of allowing independent gas producers, such as itself, to supply as much as 25 Bcm of gas to China. The government plans to minimise production tax for gas produced for China.

The coup de grace for Rosneft would be the official decision to allow its gas to be delivered to China while the large East Siberian fields are being developed.

CNPC might be looking for an LNG project with Rosneft, possibly negotiated around Sakhalin-1 gas resources. The oil company has both the gas reserves and plans to export LNG. It is actively seeking access to Gazprom's existing infrastructure. There is a pipeline running from Sakhalin, which can be extended to a site of a future LNG plant in Vladivostok. If CNPC is in the Vladivostok LNG project (with 49 percent), it would be in a position to lobby the government to allow Rosneft to be part of it.

Gazprom has long rejected Rosneft's attempt to export its gas, including from Sakhalin and Rosneft this month asked the Russian anti-monopoly service to look into Gazprom abusing its position as a monopoly by refusing access to the Sakhalin-Khabarovsk pipeline. If the government anti-monopoly watchdog does agree with Rosneft's arguments, Gazprom might need to roll over.

Why would CNPC put all this effort in for Rosneft? The Russian government has 19.5 percent of Rosneft's stake earmarked for privatisation. Reportedly, China is interested in the stake. 

The sale would kill two birds with one stone: it would put some money into state coffers, and place some friendly faces on Rosneft's board. For China, it would give it a share in Rosneft's upstream, both the oil and, potentially, the gas ones.

This is the deal that China signed in the early hours of May 21.

Map. Current and future Gas infrastructure in the Russian East Siberia and the Far East

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Edited by Martin O'Rourke

Nadia Kazakova is an expert on Russia with a particular emphasis on the oil and gas sector.

5y
Ottosen Ottosen
It would be interesting to know if you think this will make your colleague Peter Garnry's view on Gazprom, posted may 15, invalid? Or at least alter it greatly. I mean, you are the Russia gas expert :)
5y
Nadia Kazakova Nadia Kazakova
I think I am much less enthusiastic on Gazprom in a long run. Short-term, it must be possible to make good money given the volatility of the stock.
5y
Mr Smith Mr Smith
plans and focus will determine with hard work,lot of project planners does not have much knowledge to study the project before making a financial demand ........

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