The Emerging Terms of the Gazprom Deal
Last week, we provided some data skeptical of the Russian pivot to Asia as well as coverage of the on-gain, off-again Gazprom deal. That deal was finally signed and is worth a brief follow-up.
Bloomberg’s coverage provides the basic terms of the deal, which was with China’s National Petroleum Corporation (CNPC). The contract stipulates that Russia will supply 38 billion cubic meters of natural gas annually over a 30-year period, the largest such contract in Gazprom history. Prices were not revealed, but analysts are placing them between $350 and $380 per 1,000 cubic meters (though most appear to lean towards $350); The Diplomat for example puts the contract price at the same rate China pays Turkmenistan for its natural gas, well under the $380.50 per thousand cubic meters that Europe paid for its imports last year.
However, European prices may be softening as well; Italy’s Eni recently negotiated a potentially precedent-setting contract that broke the link Gazprom has historically sought to maintain with oil prices. Russia has insisted that the China deal would protect this approach, but that remains to be seen. The larger issue for world gas markets concerns the dampening effect of the deal on LNG export prices to China and thus the knock-on effects on further LNG development; Bloomberg has excellent coverage of the debate.
Supplying China will require an outlay of $55 billion to build a pipeline and other necessary infrastructure over the next four to six years it will take that much time for the gas to actually come online. Given that Gazprom’s total capital expenditure for last year was $43.9 billion last year, this is clearly a substantial investment. Chinese support for the pipeline investment was clearly part of the negotiations; in the end, China agreed to a $25 billion prepayment.
The deal—and Russia’s larger pivot--clearly reflects commercial calculations. The EIA projects OECD Europe’s natural gas consumption to grow 0.7% per annum, from about 20 trillion cubic feet in 2010 to 25 trillion in 2040. Contrast this with China alone—let alone the rest of Asia--where gas consumption is projected to swell 360% to 17.5 trillion cubic feet by 2040. But the deal also reflects a Russian effort to diversify away from Europe in the wake of the Ukrainian crisis, sanctions, and the longer-term threat that Europe will seek to reduce its dependence on Russia, perhaps through increased exports from the US if domestic political constraints on gas exports can be resolved. According to the EIA, about 76% of Russia’s natural gas exports are destined for Western Europe, which has been actively courting alternative sources.