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China and Russia sign massive gas supply contract

23 May 2014

On May 21, China and Russia signed a landmark $400 billion gas supply deal, securing for Beijing a major source of fuel and opening up a significant new market for Moscow. The deal, involving Russia’s Gazprom and CNPC of China, includes the construction of a new gas pipeline to link Siberian gas fields to China’s industrial and urban coastal heartland. 

“Russia and China have signed the biggest contract in the entire history of the USSR and Gazprom – over 1 trillion cubic meters of gas will be supplied during a whole contractual period. Russian gas will be sold at a brand new market with a huge potential,” said Alexei Miller, Gazprom Chairman.

“The arrangement of Russian pipeline gas supplies is the biggest investment project on a global scale. $55 billion will be invested in the construction of production and transmission facilities in Russia. An extensive gas infrastructure network will be set up in Russia’s East, which will drive the local economy forward. Great impetus will be given to entire economic sectors, namely metallurgy, pipes and machine building.”

Speaking at the St Petersburg International Economic Forum, Miller added that the contract would affect gas prices on the European market and also have an impact on LNG projects in eastern Africa, Australia and western Canada.

The deal opens up a huge new market for Gazprom, which currently generates around 80% of its revenues from Europe, where demand is stagnating and profits are falling.
Relations between Russia and European countries are also strained because of the crisis in Ukraine, and the effects of potential Western boycotts will be lessened by closer cooperation with China.

From the first deliveries in 2018, Russia will build up to supply China with 38 billion cubic metres a year, a quarter of its domestic natural gas consumption, enabling the latter to move away from dirtier coal-sourced power.

The major infrastructure element would be the construction of the 4,000 kilometre “Power of Siberia” pipeline, with 11,700 employed in the first phase of its manufacture and installation, and 3,000 in its operation. The pipeline will take gas principally from the 1.2 trillion cubic metre East Siberian Chayanda and Kovykta gas fields and pump it to China’s main consumption centres on its eastern coast.

An offshoot will supply Gazprom’s liquefied natural gas (LNG) export projects at Sakhalin and Vladivostok to serve major buyers such as Japan and South Korea.

The overall cost for the upstream development and infrastructure investment will likely exceed $50 billion, with China providing a prepayment of $25bn.

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