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Russia Signs Unprecedented $400 BILLION Gas Deal with China

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May 21, 2014

By Elena Mazneva and Stepan Kravchenko

May 21 (Bloomberg) — Russia reached a $400 billion deal to supply natural gas to China through a new pipeline over 30 years, a milestone in relations between the world’s largest energy producer and the biggest consumer.

President Vladimir Putin is turning to China to bolster Russia’s economy as relations sour with the U.S. and European Union because of the crisis in Ukraine. Today’s accord, signed after more than a decade of talks, will allow state-run gas producer OAO Gazprom to invest $55 billion developing giant gas fields in eastern Siberia and building the pipeline, Putin said.

It’s an “epochal event,” Putin said in Shanghai after the contract was signed. Both countries are satisfied with the price, he said.

Gazprom Chief Executive Officer Alexey Miller signed the deal with Zhou Jiping, chairman of China National Petroleum Corp. The agreement is for 38 billion cubic meters of gas annually over 30 years, Miller said. While he declined to give a price, he said the total value would be about $400 billion.

“This is the largest ever contract for Gazprom,” Miller said, adding the deal was clinched at 4 a.m. Supplies will start in four to six years, he said.

Gazprom shares rose as much as 2.2 percent, to 148.55 rubles in Moscow today and traded at 147.04 rubles at 4:04 p.m. local time.

Advance Payments

China may make as much as $25 billion in advance payments under the contract to invest in the necessary infrastructure, Russian Energy Minister Alexander Novak told reporters today.

Russia will invest $55 billion in the pipeline and the Siberian fields to feed it, Putin said, while China, responsible for a pipeline on its territory, will spend at least $20 billion, he said.

Russia and China will start talks on a second pipeline to the west of the initial route, Miller said.

Before Putin’s trip, Russian officials had said the gas- supply agreement was closer than it had ever been. Talks, which started more than 10 years ago, repeatedly foundered on the issue of price.

“It’s time we reached an agreement with the Chinese on this issue,” Russian Prime Minister Dmitry Medvedev said in a Bloomberg Television interview in Moscow on May 19. “It is very likely that there will be a contract, which means long-term contracts.”

The price should be “fair and totally comparable to the price of European supplies,” Medvedev said in the interview before Putin’s visit.

Gazprom’s average price in Europe was $380.5 per thousand cubic meters last year. The price in today’s contract is more than $350, Interfax reported, citing a person it didn’t identify.

“The price seems to be at the level of European exports,” Anvar Gilyazitdinov, who manages a $10 million portfolio of Russian stocks at Rye, Man & Gor Securities, said by phone from Moscow.“It’s adequate. Gazprom will be able to make money at that price.”

Copyright 2014 Bloomberg.

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