Wednesday, April 30, 2014

The myth of the 10-year long gas negotiations

President Putin’s upcoming visit to Beijing (20-22 May 2014) has once again raised expectations that a gas contract will finally be signed after a decade of negotiations. We have witnessed a similar ‘fever’ prior to every Russian-Chinese summit for the last couple of years. Let us have a glance at how Russia and China have repeatedly failed to agree or... how they have been faking their negotiations.

The very first agreement, which envisioned the construction of a pipeline and the deliveries of Russian gas to China, was reached during President Putin’s visit to Beijing in October 2004. Two years later, another agreement followed and the major contours of a future contract were made public. Russia’s proposal entailed the construction of two gas pipelines, along the western and eastern routes, to Xinjiang and coastal China. The total volume would amount to 68 billion cubic meters (bcm) per annum, 38 bcm for the western route and 30 bcm for the eastern one (Russian gas exports to Europe hovered between 120 and 130 bcm).

Already then it was the price which seemed to be the major obstacle. The price offered by China was at the level of US$ 100, while Gazprom’s price for gas on the European market stood at US$ 250. In practice, however, neither side was determined to strike a deal.

For Russia, the talks with China were a way Moscow could put pressure on European states. The plan was for the western pipeline (named the Altai pipeline) to be supplied from the Western Siberian gas fields, i.e. the very source of deliveries to Europe. Demonstrating the possibility to ‘switch sides’, Gazprom attempted to convince the European companies to renew long-term gas contracts and to prevent the anti-monopolist regulation of the EU gas market. At that time, China’s demand for gas remained limited, especially given that in 2006 Beijing signed a contract on a gas pipeline from Turkmenistan.

Following the 2008-2009 global economic crisis, Gazprom, faced with waning European demand and the disadvantageous EU law, seemed much more interested in striking a deal with China. The Russian government kept insisting on the priority of constructing the Altai pipeline first. For Moscow the pipeline to China continued to be primarily an element of its policy towards the European Union, providing convenient leverage and increasing its bargaining power. The western gas pipeline was also supposed to discourage China from finalising a gas agreement with Turkmenistan. In this case Moscow clearly underestimated Chinese resolution in acquiring access to gas supplies from Central Asia. The eastern route was regarded by Gazprom as a future development.

The series of agreements which followed between 2009 and 2011 seemed to conform to Russia’s vision of gas co-operation with China. According to declarations from both sides, new details were agreed almost every three months. A comprehensive agreement on the western gas pipeline was allegedly reached in September 2010. This document foresaw gas deliveries to begin in 2015, with a volume of 30 bcm per year. In mid-2011 Gazprom went as far as declaring it would be concentrating on the Altai pipeline and abandoning the eastern route.

On the surface, the price remained the only hurdle. But there were more factors which spoke against the feasibility and profitability of the Altai gas pipeline. Even though China’s demand for natural gas skyrocketed, Beijing’s bargaining position vis-à-vis Russia strengthened. Having secured access to alternative gas sources – constructing pipelines from Turkmenistan and Myanmar and LNG terminals – China felt no pressure to close talks with Russia without obtaining serious concessions. China’s primary needs for gas were concentrated on the eastern coast. The western route, promoted by Gazprom, would require additional investment in Chinese domestic pipeline infrastructure. Moreover, even Gazprom’s own plans, the so-called “Eastern Gas Programme”, assumed that the deliveries to China along the eastern route are necessary for the project to be profitable.

The Altai pipeline made no economic sense either to China or to Gazprom. Why did Russia promote this route so stubbornly? The only logical conclusion is that as late as the end of 2011 at least one of the sides was conducting negotiations on the western gas pipeline in bad faith. The Russian-Chinese talks were just a facade, which was supposed to help Gazprom gain concessions in the European market. Real negotiations started in early 2012, when Gazprom and CNPC dismissed the Altai project and re-focused on the eastern gas pipeline.

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