May 19, 2014


China Gets Upper Hand in Russia Gas Deal (ABHEEK BHATTACHARYA, May 14, 2014, WSJ)

Russia's conflicts on its western frontier are pushing it into the arms of its eastern neighbor. That could finally seal Russia's long-promised natural gas deal with China--but more on China's terms. [...]

In the past year, though, CNPC has gained the upper hand. Gazprom's European price has fallen to about $10.8 per mmBtu as of April, as it offers discounts to compete against Norwegian and African supplies. Meanwhile, U.S. gas exports are set to grow on the back of its shale revolution, possible given added impetus by a desire to reduce Russia's market power amid the Ukraine crisis. This gives China more options down the road. And as for China's desperation to tackle pollution, a gas deal wouldn't clear the skies overnight anyway.

Russia last year said a price formula was at hand, though China has been more circumspect about whether the two sides are so close. Even if Russia gets its wish for an oil-linked formula, CNPC could force a link to oil at a low level in its favor, says Trevor Houser at the Rhodium Group, a New York research firm. CNPC buys Turkmen gas at an oil-linked but low-level price.

Gazprom may also need to tap Chinese financing. It has to spend $80 billion to build the China pipeline and associated projects, according to James Henderson at the Oxford Institute of Energy Studies. That gives CNPC another bargaining chip.

The more isolated Russia gets from the West, the more it must pivot to China in energy matters. The two energy giants may soon come together on natural gas, but not as equals.

Posted by at May 19, 2014 6:46 PM

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