I’m sure you all remember the Russia/China gas deal that was formed earlier this year. For those who need reminding, a deal worth a reported US$ 400 billion was struck between the two countries. Under the agreement, China will receive 38 billion m3/y of gas in a 30 year arrangement which will commence in 2018. This agreement was a source of much comment and speculation but let’s face it, who can blame these two economic giants for forming an alliance?
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China is crying out for energy and in particular oil and gas. According to a recent Global Energy Weekly from Bank of America Merrill Lynch, it is expected that China will ‘add 600 000 bpd of new refinery capacity in 2014’ and that ‘Chinese CDU expansions [are going to] amount to almost a million bpd over the next two years’. This domestic capacity will of course go a long way to meet demand, however, more is going to be needed and this is an area in which Russia has seen a gap it can fill. Traditionally, Russia has been a big supplier of oil and gas to Europe. However, as the recession, Euro Crisis and slowing GDP has taken its toll on the region, demand for natural gas from Russia has been somewhat low. Now, Russia is perfectly geographically placed to help China fill demand. Gazprom has even begun construction of a major gas pipeline to send supplies to China from its largely untapped Eastern Siberian reserves and Gazprom and China National Petroleum Corporation have already inked a US$ 25 billion payment agreement for gas supply.
China is also lending Russia a helping hand with this alliance. Russia is looking to diversify its market. This is not only because of the financial problems in Europe, discussed above, but because a heavy reliance by Russia on Europe as an export market leaves it open to the risk of further sanctions. At the moment, US and EU punitive measures do not include energy exports from Russia, however, as some sanctions are in place investor uncertainty is impacting the financial flow, and further future sanctions are always a possibility. China is also helping Russia by investing in its oil and gas infrastructure. It has been clear for a while that China is looking to secure oil and gas resources overseas, as the country has made several investments in the Canadian oilsands. Now, Chinese financial companies, as well as oil and gas companies are investing in transportation and infrastructure to allow easy access to Russian oil and gas. Also, as many deals being made between the two countries are credit positive, Russia is facilitating its own construction of domestic energy infrastructure.
As China becomes ever more energy hungry and Russia thrives on the success of the agreements already formed, I have no doubt that this partnership will do nothing but blossom in the coming years.