Russia, China Finally Ink Landmark Gas Deal

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The deal finally got done. Russia and China announced they inked a $400-billion gas supply deal on Wednesday, locking in a major source of cleaner fuel for the China and opening up a significant new market. The agreement has been in the making for almost a decade, and finalizing the deal is a major coup for Russian President Vladimir Putin, who needs partners in Asia as Europe and the U.S. work to isolate him over Russia’s military annexation of Ukraine’s Crimea peninsula.

Statement from Putin

“This is the biggest contract in the history of the gas sector of the former USSR,” Putin commented after the agreement between Gazprom OAO (MCX:GAZP) (OTCMKTS:OGZPY) and China National Petroleum Corp. was finally signed in Shanghai.

“Our Chinese friends are difficult, hard negotiators,” he continued, noting that talks went on until 4 a.m.

“Through mutual compromise we managed to reach not only acceptable, but rather satisfactory, terms on this contract for both sides. Both sides were in the end pleased by the compromise reached on price and other terms,” Putin said.

Details on Russia – China gas deal

The exact price that Russia and China negotiated was not released, but sources at the companies said Gazprom OAO (MCX:GAZP) (OTCMKTS:OGZPY) refused to go below $350 per thousand cubic meters. Most European utilities currently pay $350 to $380 per thousand cubic meters under discounted long-term contracts inked in the last couple of years. Putin mentioned that the price formula was similar to the European price relative to the market value of oil and oil products.

A price of $350 per thousand cubic meters is below the cost of importing liquefied natural gas (LNG), an alternative energy source that China has already invested billions in. Increaserd use of clean-burning natural gas will also help Beijing in its “war on pollution” designed to ameliorate the harmful smog smothering major cities throughout the country.

The issue of whether China will pay a lump sum up front to fund the significant infrastructure costs apparently remains up in the air.

Putin commented that China will provide $20 billion for gas development and infrastructure, but Gazprom OAO (MCX:GAZP) (OTCMKTS:OGZPY) CEO Alexei Miller said the two sides were still negotiating over an advance.

The gas will be delivered via a new pipeline bringing Siberian gas to China’s main population centers on the coast. Russia plans to begin delivering gas in 2018, eventually building up to 38 billion cubic metres (bcm) a year.

the deal calls for Russia to invest $55 billion in exploration and pipeline construction up to the border with China, and CNPC being responsible for building the Chinese section of the pipeline.

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