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Market Update

Russia and China in 30-Year Gas Deal on New Geopolitical Realities

Author: Bikram Pandey
Last Update: 3:52 PM ET May 21 2014

Russia and China agreed on a natural gas after a decade long discussions culminated under a new geopolitical realities.

President Vladimir Putin agreed to sell natural gas to China over a pipeline for 30 years and the deal is valued at $400 billion.

Russia based Gazprom Chief Executive Officer Alezey Miller signed a deal with Chairman of China National Petroleum Corp Zhou Jiping in Shanghai today in presence of President Putin and President Xi Jinping of China.

Russia will begin the supply of 38 cubic meters of natural gas each year to China in 2018, according to the information posted on the website of China National Petroleum.

China will provide $25 billion of advance payment for Russia to complete the pipeline and expedite the development of fields in Siberia and China will spend additional $20 billion to develop pipeline network infrastructure within its borders.

President Putin said Russia will spend $55 billion to develop Siberian fields and pipeline to transport the natural gas to the border with China.

The agreement is silent on the price and both parties have struggled in the last ten years as Russia held out for higher prices and China negotiated hard and sought a bargain.

Gazprom received an average price of $380.50 per thousand cubic meters from its customers in Europe.

Sources in Gazprom and Russian oil ministry suggest that the expected price for the natural gas delivered to China is going to be determined by market prices but will be lower than the prices achieved in Europe. However, the discount is not likely to be more than 10%.

The agreement struck between two nations almost did not happen after both nations struggled to compromise on the price and delivery time frame.

However, the recent geopolitical situation may have added urgency for Russia. China has secured its natural gas from several countries including the recent delivery of gas from the newly discovered fields in Myanmar.

The brewing crisis in Ukraine and rising tensions with Germany and the U.S. has forced President Putin to look for alternative source for its energy exports.

Sources: Data collected by 123jump.com and Ticker.com from company press releases, filings and corporate websites. Market data: BATS Exchange. Inc