Putin’s Pyrrhic victory in Shanghai

Gazprom (Photo credit: Wikipedia)

In the context of final signing of the gas treaty Gazprom- CNPC, it is necessary to write a few words about it.

The Middle Kingdom “waited out” the Russians the imperial style. Until the very end of Vladimir Putin’s visit, the final conclusion of the discussions wasn’t known. Finally though, Beijing showed some mercy to the Russians and agreed upon signing the treaty. Its content, however, is not necessarily advantageous for Russia.

The sides were mainly disputing about the price:

China: max $250/1000m3 (that is how much it is paying Turkmenistan)

Russia: min $350/1000m3 (the lowest profitable price)

The disagreement is not, however, about the unknown number. Why not?

The difference between the Turkmenistan and Russian offer is the fact that the Russian price is based off of the oil price index, which means that its final price increases as the cost of oil goes up (it is still uneasy in Libya, the dollar is cheap). The Chinese demanded to base the price off of the Henry Hub index, a USA gas market, in which the prices of this raw material are low due to the shale revolution.

In the face of the costly construction of the pipeline Power of Siberia ($80-90 bn – it is more than the cost of Nord Stream and South Stream out together) in order to start the deliveries (the earliest in 2018, and in reality even in 2020) such a low price will not be profitable for the Russians. Gazprom will invest $55 bn in the development of mining and the pipe (about twice as much as in South Stream) and China will invest $20 bn, but only in its part of the Power of Siberia. The negotiated by Gazprom offer is still unknown, but it is appropriate to estimate it around $350/1000m3 because Russia will not want to give up on the oil price index. Why not?

It is the indexation and other clauses of gas deals with Russia that allow for the political manipulations of the gas prices. Many sorts of discounts (ex. for quartering the Black Sea fleet), orders (take or pay) and restrictions (re-export ban) allowed Moscow to control its clients and, therefore, control the governments of the countries that imprecate this raw material. Even though certain companies (RWE supported by the government in Berlin) managed to drift away from the indexation and other clauses, generally they are reinforced in every contract. Their detailed records are secret, which gives opportunity for manipulation for the Russian politicians. That is why the Chinese used the sanctity of the Russian energy politics. They had the right arguments in order to implement their expectations: they have a diversified delivery wallet and the deal with Russia is only a supplement (the volumes from Turkmenistan and Burma, in the perspective of LNG deliveries from Asia and the Pacific, and the South America), money (for infrastructure – they will finance the pipes on the Russian side only as a loan) and political position (in the face of the Ukrainian crisis, Vladimir Putin needed glamorous success in diversifying the clients because he would use that as a threat in the EC-Ukraine-Russia discussions and during the talks about exempting Gazprom from the anti-monopoly policy). That is why the Middle Kingdom ruthlessly used the situation of Russia and limited everything only to the bare minimum. $350/1000m3 is less than the European average ($385/1000m3), so at the border of profitability. If we were to add the colossal, and even though partly covered by Gazprom, costs of constructing the infrastructure, it is easy to state that Russia will have to chip in on this deal.

Read also: Gazprom writes law

The Power of Siberia will come into existence only if the Chinese don’t back out: withhold the financing or stop the construction of the Chinese segment of the pipe. The Gazprom’s gas for CNPC will eventually make its way to the Yellow River because the demand for gas in the Middle Kingdom is predicted to be constantly increasing. It will not be, however, a “monumental success” about which all of the Russian media are talking about, even though there probably will not be much change in how the news portray the situation – for propaganda reasons. The deal with CNPC doesn’t give Gazprom diversified clients because the gas for China will flow from the Eastern and not the Western part of Siberia. The discussions about creating a gas corridor from the Western Siberia (where the deposits are exploited for the European market) have only begun and could last another 10 years analogically to the currently finished discussions. A bigger success, however, is the Novatek-CNPC agreement about the LNG deliveries from the terminal on the Yamal Peninsula as a part of the Yamal LNG, in which the Chinese already participated. That gas is currently being offered to Europe, and it would be a real chance for diversifying the Russian clients. But not for Gazprom, the former leader of the Russian gas sector, but for Novatek, a growing competitor for the leading role in the Russian energy politics, and Rosnieft, which is also planning gas conquests in Asia. Therefore, the Gazprom contract is Putin’s Pyrrhic victory. It is also the prediction of the increasing meaning of China in Russia’s energy politics and, as a result, increasing influence of Beijing in Russia.

Translation: Marlena Kister

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