November 10, 2014 / 4:56 AM / 5 years ago

Russia, China ink framework deal on second major gas supply deal

BEIJING (Reuters) - Russia and China signed a framework agreement on Sunday for a new gas deal, just months after the two sides sealed a long-awaited supply agreement worth up to $400 billion, part of President Vladimir Putin’s strategy to bolster ties with Beijing.

Coal-dependent Beijing is keen to secure long-term access to Russia’s natural gas, while Putin is steering his country’s economy towards the east in a bid to avoid isolation following the Ukraine crisis and the imposition of Western sanctions.

“Cooperation between China and Russia is utterly important in order to keep the world within the limits of international law, to make it more stable, more predictable,” Putin told his Chinese counterpart Xi Jinping on Sunday.

Last month Russia and China signed energy, trade and finance agreements, including a currency swap worth 150 billion yuan ($25 billion) and intended partly to reduce the influence of the U.S. dollar.

China and Russia have been discussing two gas pipeline routes from eastern and western Siberia since the early 1990s.

After years of wrangling, mostly over prices, they came to an agreement on the eastern route in May, with Russia’s top gas producer Gazprom (GAZP.MM) committed to delivering 38 billion cubic meters (bcm) of gas a year across China’s northeastern border.

Some analysts thought the western route had been shelved as China is receiving huge volumes of gas from central Asia, but under the new agreement Russia will sell an additional 30 bcm to Beijing for 30 years via deposits in West Siberia. The gas will be delivered through the proposed Altai pipeline.

When the route is complete, China will become Russia’s biggest gas customer, providing the world’s top energy user with a source of cleaner fuel and opening up a new market for Moscow.

The two pipeline deals, amounting to 68 bcm of annual supplies, could account for nearly 17 percent of China’s total gas consumption by 2020, said Gordon Kwan, senior energy analyst with Nomura, in a note on Monday.

The memorandum of understanding was signed between Gazprom and state-owned China National Petroleum Corporation (CNPC), the Russian government said in a statement.

“Most people felt that the western route had died or fallen asleep because of the amount of gas coming (into China) from Turkmenistan, but now it is back on the table,” said Tony Regan at Singapore energy consultancy Tri-Zen International.

CHINA IN NO HURRY

While China is believed to be in no hurry to boost supplies, at least until after 2020, discussions on the second gas deal have accelerated in recent months.

“Currently, Gazprom and CNPC are in talks over the fulfillment of the contract, and our leaders have just agreed to sign (a firm) contract in the first half of next year,” Russian Energy Minister Alexander Novak told reporters.

“The western route is becoming the priority for our gas cooperation,” said Gazprom Chief Executive Alexei Miller, adding that major conditions, including the timeframe for building the pipeline and rate of increasing supplies, have been determined.

“The volume of gas supplies in the medium term could be 60 (billion) or 100 billion cubic meters of gas (a year),” he said.

China wants to boost long-term gas supplies from both Russia and Central Asia, but analysts said much of the impetus for the new agreement came from Russia, with Putin eager to secure more Asian partners as Europe and the United States seek to isolate him over the annexation of Ukraine’s Crimea.

“The Russian side will be the keenest at the moment because it will access the same blocs that would otherwise be going into Europe,” said Regan. “I don’t think China is in any particular hurry to consummate this deal.”

Under the terms of the framework agreement, CNPC will also buy a 10 percent stake in Russia’s Vankorneft, which is a subsidiary of Russia’s biggest oil producer Rosneft (ROSN.MM).

The increased gas imports will also help Beijing wean itself off coal as it tries to curb pollution, but current gas demand is struggling to keep up with the supplies being made available.

“Until 2020, China is very relaxed about supply,” said Regan. “It also has the last card – it has to agree on price, and it can prevaricate for as long as it wants.”

Writing by Fayen Wong and Ben Blanchard; Additional reporting by David Stanway in BEIJING; Editing by Andrew Heavens, Keiron Henderson and Richard Pullin

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