EDITOR: | May 22nd, 2014 | 23 Comments

Beijing signs for Russian gas supplies — a boost for both partners over U.S. interests

| May 22, 2014 | 23 Comments
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Putin-OilThe business deal is massive. The long-term implications for the geopolitics in East Asia are much greater with the signing in Shanghai Wednesday by Russia’s Vladimir Putin and China’s Xi Jinping which will see, from 2018, Russia’s Gazprom sell 38 billion cubic metres of gas a year to China National Petroleum Corp.

A very telling point is made in today’s The Financial Times: that there exists a strategic triangle encompassing Washington, Moscow and Bejing, and that if two of those players forge a strong relationship then it freezes out the third. Thus Nixon’s opening to China left Moscow out in the cold, and on its own, and helped lead to the the weakening of the former U.S.S.R.  Now Moscow has, with the new gas deal, forged a strong tie with Beijing. A victory for both, or so it would seem.

Or maybe not. China is going to be the main beneficiary. The triangle analogy is not quite sustained by the fact that Russia actually comes in second place. Yes, it will earn $400 billion from piping gas to China, but as the FT also notes that is only one-quarter of the gas it sells to Europe, and the future of that business (sanctions in the short term, LNG from the Middle East and the U.S. in the longer term) are in question.

If however, Moscow can now build on this deal to get into other Asian markets, then that will be another matter. As I reported here on Investor Intel just a month ago, the Russians forgave almost all of North Korea’s debts in April as a trade-off under which Pyongyang will allow the Russians to build a pipeline across the DPRK to supply South Korea, a huge importer of gas. The pipeline that will be laid to supply China from Russia will allow development of gasfields in eastern Siberia — and once those fields are in business, Russia has plans to build a liquefied natural gas plant art Vladivostok to supply LNG to South Korea, Taiwan, Japan and China. There is already an LNG facility on Sakhalin Island, which could also be expanded to supply Asian markets.

There is little doubt that the U.S. is the one out in the cold. Apart from the geopolitical relationship with China as signified by the agreement signed in Shanghai, the Russian gas coup has tremendous implications for the big shale gas plans harboured by the Americans. It was these Asian markets — China along with three staunch U.S. allies in Taipei, Tokyo and Seoul — that are being targeted by American energy companies and the potential of these markets as an export market was the main the impetus for the U.S. investment in LNG.

China is certainly a big winner. It has apparently driven a hard bargain on price secure in the knowledge that the Russians are clearly anxious about their European markets, and revenue from which is an important pillar of the Russian economy.

A note from Deutsche Bank’s London analyst Michael Hsueh says the East Siberia fields were too far from Europe to justify developing them for that market, and gaining a large customer in the form of China is a substantial economic victory. “It also gives Russia an opportunity to access an Asian market which is increasing in demand as opposed to the European market which is generally shrinking,” he wrote.

Of the top 10 countries by GDP, China has the smallest share of natural gas as part of its energy mix — just 4.7%. Russia has more than 50% of its domestic energy needs supplied by gas, the U.S. 30% and even India and Brazil have integrated natural gas into their economies more than has China, the country with the worst air pollution of all 10.

Hsueh deduces from the wording of the agreement that China has decided to take the fast from East Siberia rather than earlier plans to tap the West Siberia fields and pipe the bags to Xinjiang province in China’s west. He points out that, while Russia will be cheered by the prospect of finally tapping the East Siberia gas, the choice of the western route would have strengthened Gazprom’s hand in negotiating terms with European customers.

Clearly, American energy strategists and companies will be looking at their own plans in light of this development (although it is hardly a surprise: discussions had been under way, on and off, for 10 years). Perhaps it might lead to their taking more interest in Western Europe LNG markets, After all, the Europeans want to free themselves of Russia’s gas grip.


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Comments

  • Nevada George

    The U.S. is left out in the cold at this point in time.
    Unless, we start developing our NG and strive for
    a competitive advantage.
    It was inevitable, as our Domestic Polices on developing
    and exporting our NG assets are about as political as it
    can get.
    Maybe this is the Geopolitical move that will wake up the U.S.
    lawmakers and regulators.
    It will be interesting to see what happens in the precious metals
    markets if the ROW considers this an indication the U.S. and
    its currency are in demise.

    May 22, 2014 - 11:38 AM

  • hackenzac

    It’s not an either/or out in the cold thing for anybody. Any deal like this that gets China off of its coal binge is good for everybody

    May 22, 2014 - 1:36 PM

  • David Mortimer

    2O BILLION A YEAR THAT WOULD BARELY KEEP THIER ARMED FORCES GOING .

    May 22, 2014 - 4:47 PM

    • Robin Bromby

      David: That is true in the short term. But look at this as emblematic of a change in the axis between Beijing and Moscow. If you look at the history over the past 100+ years of relations between the two countries, Russia and China have been at loggerheads more often than cozying up to each other. Look at the situation in the 1930s, and then Stalin’s approach to the Kuomintang v. Mao’s Communists.

      We don’t know yet what this gas deal really means, but if it ushers in a new era of warmth between these two powers then it will have ben truly significant.

      May 22, 2014 - 5:55 PM

  • David Mortimer

    Innovation that is how the US can win they now see what China and Russia have done with their success that the free world gave them they are now turning on the hand that fed them time for the western world to get together lets bring manufacturing jobs to other countries like vietnam etc , lets bring jobs back to Europe and the US , China needs a bloody nose economically and the Russians are only as good as the amount of oil and gas they can flog.

    May 22, 2014 - 4:52 PM

    • Robin Bromby

      Yes, but who is going to do it? Not the weaklings in charge (if we can use such a strong term) in Washington. Putin has got Obama’s measure, and Moscow knows the U.S. will squib any geopolitical challenge.

      May 22, 2014 - 5:47 PM

      • hackenzac

        What would you have Obama do? Send the fleet? He’s given Putin a major headache just in oligarch asset freezing alone. Saber rattling Putin as you seem to be advocating is pointless but there is something that YOU can do besides wringing your hands. Check the label and don’t buy it if it’s made in China and that includes Russian nesting dolls and American flags. Oh, and on being “the hand that fed China and Russia” that is a large country crock of bullshit, if I can use such a strong term. Why do you think they went communist for gawd sake? Ding, ding, ding, try capitalist exploitation. Did you ever here of the Boxer Rebellion?

        May 22, 2014 - 6:29 PM

        • hackenzac

          hear, not here, hear

          May 22, 2014 - 6:31 PM

        • David Mortimer

          China are more capitalist than the capitalists in the west , they went communist to control the masses , how many people live below the poverty line in china? More than the US and Europe put together China is held together by Glue made in the west if we take away the glue the whole house of cards comes crashing down and they know it.

          May 22, 2014 - 6:52 PM

          • hackenzac

            I was referring to David Mortimer and his biting the hand that fed them claim, not you so much Robin but I do take issue as well with some of your expectations as to just what you can reasonably expect from US leadership and the popular right wing meme that it’s ineffective and/or squishy. As if China and Russia owe the US for bringing them capitalism. HA! That’s the big country crock which I was referring. The Boxer rebellion is germane to the Chinese memory of Western exploitation and motivation for going commie and even if the timelines don’t match up to your direct cause and effect satisfaction, it doesn’t make it a non sequitur, far from it. From their angle, they are quite right to mistrust the west as the west should not trust them as well.
            As for a 20 billion dollar gas deal with a pipeline through North Korea, yeah, good luck with that one. Somebody should ask the Israelis what they think about gas piped from Egypt. Non sequitur or apt analogy? You decide. Even if China and Russia get married and make lots of petrorublereminbi babies, it’s negligible effect on the US. The US (Enterprise Products Partners) is building the largest refrigerated LNG terminal in the world and there’s enough market for everybody’s gas. The Saudis should be worried but screw them. Russia pretty much just handed over the Western European gas market to the US. I’m not seeing a big Ruskie/Sino advantage going forward, far from it. Like I said, all that has to happen is for consumers to wake up and ask where all the shrimp in the all you can eat buffet came from. China knows this and that’s why they’re moving so frantically away from an export model. They fear us and rightfully so, for a hundred years and then some.

            May 22, 2014 - 8:46 PM

        • Robin Bromby

          Really, there is no need to get so angry and abusive. Anyway, your post is a string of non-sequiters. The Boxer Rebellion and China going communist were 49 years apart. The causes of the two events had many different components (although some in common, too). Actually, had not the Japanese struck in 1931 and, more tellingly in 1937, the KMT government – which, you may possibly know, was the product of the 1911 revolution – might have succeeded in establishing its authority throughout China and been able to set up government in Peking and not Nanking, which was symptomatic of Chiang Kai-shek’s inability to extend his writ to north China. The KMT had the backing of Moscow, not the Mao forces. Had the Japanese not invaded, the Communist army might itself have been subdued.

          So can we discuss these matters with just a little civility?

          May 22, 2014 - 7:38 PM

          • Robin Bromby

            My post was directed at hackenzac, whoever he might be, not D Mortimer. I clicked the wrong “reply”

            May 22, 2014 - 7:40 PM

      • David Mortimer

        China have been spying on US companies for years and stealing western innovation for their own sinister economic means , the world is now waking up to the two headed eastern monster that has started of late to raise their ugly heads in the Ukraine and the south China seas bulling its smaller neighbors with threats and hints of violence if they dont play ball ,the question is how do we deal with this two headed monster that has grown fat on western money , we’ve watched China grow from been a backward staunchly communist secretive state to a quasi capitalist super power Russia from a creaky old rusty Bolshevik ship wreck into a fossil frenzied supplier to the world “yuppie” show me the money and we’ve all clapped them on the back saying good on you (screw human rites ) but what we’ve failed or hoped to acknowledge is what happens when the new kids on the block wants the whole block .

        May 22, 2014 - 7:13 PM

        • hackenzac

          Are you boycotting China? I am and have been since they decided to run over their kids with tanks. With globalization, it’s hard to do, especially with electronics but when American flags and cowboy hats are made in China as well, that’s a big country crock of patriotic hypocrisy.

          May 22, 2014 - 8:52 PM

          • David Mortimer

            You must live like Robinson Crusoe .lol

            May 23, 2014 - 5:58 AM

          • Veritas Bob

            In addition to the comprehensive multi-tier supply chain analysis which you have undoubtedly performed in order to undergird your boycott, I presume it is your goal to eliminate U.S. jobs, since reciprocal boycotts will cut U.S. exports.

            May 23, 2014 - 9:26 AM

          • hackenzac

            I’m a vintage dealer, have been for years. My Levis are American. That’s how I handle my supply chain. I don’t care about yours VB but you can also do it if you care to, the operative word being ‘care’. I don’t buy Chinese stuff period. I just deal with the tail end of the supply chain, the stuff that’s already in your closets bought back in the days before China was sic, a most favored nation.
            Just so I’m clear about being political and not anything racial, made in Taiwan is not a problem for me. Know your enemies. Like I’ve known for a long time, the way to deal with China is simple. Don’t buy their stuff. Made in India is so much better. Made in Pakistan, not so much. Made in China, no, screw them.

            May 23, 2014 - 11:16 AM

          • Veritas Bob

            “That’s correct Bob, with some exception for modern electronics, no Chinese stuff, none, zero, zip, nada.”

            In other words, except for your exceptions, you have no exceptions.

            May 24, 2014 - 10:03 AM

        • Veritas Bob

          So hackenzac, you’ve made sure that all suppliers to the American manufacturers from whom you buy do not manufacture or source supplies from China, and all of those suppliers’ supplier’s, etc., and all tooling used by all tiers of suppliers, etc.? I also presume that nothing from China entered into the supply chain on the computer from which you are posting, hardware and software?

          May 23, 2014 - 5:06 PM

          • hackenzac

            That’s correct Bob, with some exception for modern electronics, no Chinese stuff, none, zero, zip, nada. Just because you can’t imagine how doesn’t mean it’s not doable. I’m not buying their stuff and neither should you. They are the enemy. You are aware that we are in fact at war with them correct? Maybe when they quit finning sharks, trading in tiger penis, elephant ivory, bear gall bladder, hacking, stealing trade secrets etcetera, etcetera, etcetera, I’ll change my mind but until then, screw them. They’re pirates.

            May 24, 2014 - 3:03 AM

  • Robin Bromby

    Apropos the new detente between Russia and China, it seems China is planning a Trans-Pacific Railway that will go through Siberia then under the Bering Strait to come up in Alaska. The reports from Beijing say that Russia is keen on the idea – of course, Russia would have to agree to the corridor and has separately been looking at the idea of taking lines through a tunnel to Alaska

    May 23, 2014 - 12:32 AM

    • hackenzac

      Somebody should inform the Alaskans. It may mar the view from Sarah Palin’s deck.

      May 23, 2014 - 12:08 PM

      • David Mortimer

        That’s the same woman that built a road and Bridge costing 380 million that led no where!

        May 23, 2014 - 1:17 PM

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