China-Russia gas deal a long-term endeavor

By Liu Qian Source:Global Times Published: 2014-5-27 22:18:01

During Russian President Vladimir Putin's recent visit to Shanghai for the Conference on Interaction and Confidence Building Measures in Asia, China and Russia signed a 30-year $400 billion gas supply deal. The signing of the contract came as a major breakthrough after 10 years of negotiation. Now the authorities and companies of the two countries can work on how to implement this hard-won contract.

This contract was signed amid the Ukrainian crisis while Russia faces Western sanctions. Some speculate that Russia had no choice but to make price concessions to enter China's huge gas market so as to gain financial support. Some others believe Beijing had to accept Moscow's conditions as it faces a shortage of supply and severe air pollution. There is also the argument that China and Russia are countering pressure from the West.

These analyses are not groundless, as the above elements are what matter in bilateral consultations and contract negotiations. Nonetheless, they neglect the long-term efforts of the two in establishing the strategic partnership and reaching mutual understanding in energy cooperation.

Any serious commercial contract must undergo a process of thorough preparations, precise consultation and complicated negotiations. Both China and Russia are skillful at negotiations and both hold a cautious attitude. Besides, the talks on natural gas are not just commercial. The two governments and energy authorities have also been working toward creating favorable conditions for the deal.

Negotiating for gas supplies is a complex process because natural gas is not a normal commodity but a deeply embedded resource. The sale of natural gas largely depends on the route of pipelines and is restricted by the capability of pipeline transmission.

The international practice for gas deals is that a contract is signed first, and then the gas field is explored and transportation facilities constructed.

Although East Siberia is rich in natural gas, it hasn't been commercially explored and the supply capacity and supply route must be studied. Meanwhile, China's natural gas market has huge consumption potential, but for a long time, the price mechanisms were not sound and the basic infrastructure was not well developed. Both of these issues require reforms.

Therefore, when China and Russia signed an agreement on gas supplies in 2006, Russia began to integrate its gas assets in East Siberia and coordinate communication among the federal government, local governments and gas companies. It also issued guidelines for the Eastern Gas Program and fixed the design plan of the eastern gas pipeline.

At the same time, China had been developing its gas supply network and reforming its price mechanisms. Bilateral efforts were the key to this latest deal.

As for the price of natural gas, it is the core of the whole negotiation and not as simple as fixing a number.

The price is determined by a whole system that includes the varieties of alternative energies and their composition, the quote the gas price refers to, and the proportion of take or pay. It needs to take into consideration the real situation of gas deals between China and Russia, and no contract models can be copied.

Both have to discuss whether the two governments can offer tax-free conditions, the amount of advance payment and the conditions for pipeline construction that China will provide to Russia. These are new problems and have never been discussed during previous bilateral deals.

Undeniably, the current international situation has had some impact on the signing of this gas deal. However, without the efforts of both sides, external factors alone couldn't prompt the conclusion of deal.

The signing of the contract is only the beginning of the gas supply process, and there are concrete problems to be solved.

It will take at least another four years to begin transferring gas. And in this process, the international situation and energy market will keep changing. There are still possibilities of rivalry between the two powers, and the only way out is for them to head toward a common goal.

The author is an assistant research fellow at the Academy of Chinese Energy Strategy with the China University of Petroleum, Beijing.

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