Russia-China Gas Deal: The End of the US-EU Energy Power Play?

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It may become harder for the United States and European Union to counter belligerent geopolitical moves by Russia and China, partners in an estimated $400 billion gas supply deal.

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It does not necessarily reflect the views of Rigzone.

Much of the United States' clout in global geopolitics after World War II has been marked by its abilities to tie-up with countries rich in fossil fuels, particularly the regimes of the Middle East. However, the fine balance which has been maintained with great caution and prudence is at risk of being undermined by two of its biggest competitors – Russia and China. The coming together of the two nemeses, underlined by a recently concluded blockbuster natural gas deal, means that the U.S. and European Union (EU) together would find it difficult to counter the increasingly belligerent geopolitical moves by these powers of the East.

The 30 year, gas supply deal valued at around $400 billion signals the gradual shift in the dynamics of Russia's global energy trade. Under the provisions of the contract, Russia's Gazprom would supply 38 billion cubic meters of gas each year to China National Petroleum Corp. (CNPC). Highlighting the political importance of the deal, the contract was signed in the presence of the Russian and Chinese leaders Vladimir Putin and Xi Jinping, respectively. Both leaders are trying to roughshod their way against their smaller neighbors.  While Russia's meddling in Ukrainian affairs has raised many eyebrows, China's claim to the highly contested and disputed Senkaku islands has sent Japan in a tizzy. The Chinese stance over the disputed waters of the South China Sea, wherein it has locked horns with as many as four other South East Asian neighbors, has also been a source of tension in the region.

Until the conclusion of the deal, Europe was the primary market for the Russians, but this development is bound to be a source of anxiety to European policymakers, and also in the U.S., where President Obama has been under severe domestic pressure to counter Russia's intervention in Ukraine. Until now the strategy has been to apply economic pressures through sanctions, as in the case of Iran previously. However, Putin's usual trick of one-upmanship has meant that though the price elicited is lower than what Russia gets in Europe, its bursary would remain healthy – even if further sanctions are imposed.

Terms of the just-signed deal between Russia and China weren't disclosed, although sources suggest it was in the region of $9-$10 per million British thermal units (mmBtu). This would mean the Chinese are getting a better deal than Russia's European buyers, who pay about $10.60 per mmBtu. That would not hurt Russia much and would give the Eurasian energy powerhouse some breathing space in the medium to long term in the continuing saga of brinkmanship, wherein it tries to up the ante across fragile regions ranging from Syria to Ukraine.

The deal is a win-win proposition for China as well. Not only has the communist behemoth been successful in driving down the price, but also secured a long-term deal from a neighboring country that insulates it from the vagaries of the global liquefied natural gas (LNG) markets. With an economy so highly dependent on manufacturing that requires heavy doses of energy supply, this deal augurs well for China. It gives the country more bargaining power with the Gulf countries and places it on a better footing as compared to its rival Japan, which has been forced to lift expensive LNG from the Gulf and elsewhere at high rates.

Other Asian consumer biggies – including India and Pakistan – would be tantalized by the prospect of a similar arrangement for themselves. Both South Asian rivals have already been working on the modalities of the Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline, which would transport from the gas-rich central Asian country to South Asia. Even Bangladesh has evinced interest in the project. Interestingly, India has been reluctant to criticize Russia on the Ukraine issue and has been moving toward Putin seeking greater partnership in the energy sector. Recently, the ONGC Videsh Ltd, the overseas arm of the state-owned explorer ONGC, signed a deal with Russia's largest oil and gas producer Rosneft  to jointly explore hydrocarbons in the offshore Arctic.

The transnational pipeline could spell further benefits for Russia and could woo other consumers such as Japan and South Korea. Bloomberg has reported that a group of influential Japanese lawmakers are lobbying hard for pipeline connectivity to Russia for gas supplies. The fact that Japan is critically in need of energy supplies has not escaped the attention of the Russians, especially in the aftermath of the Fukushima disaster. It is perhaps for this reason that the pipeline, starting from Siberia, runs via Vladivostok – the all-weather port on the eastern coast.


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