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Russia signs 30-year gas deal with China

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A few weeks ago, Russia and China signed a 30 year gas deal valued at $400 billion. The deal, which is expected to start in 2018, has taken some ten years of negotiation.

Infrastructure investment from both sides will be worth more than $70 billion, with Russia providing $55 billion up front and China $22 billion for pipelines on either side.

Russia will supply China with 38 billion cubic meters of gas per year, which will cross Siberia to reach China’s populous northeast regions. However, we must note Russian gas exports to Europe in 2013 were 161.5 billion cubic meters.

China’s incentive for the deal can be based on its need to tackle its air pollution problem. They are heavily reliant on coal-burning power plants which have created unprecedented levels of pollution, engulfing some cities in permanent smog. A switch to gas generation would drastically cut pollution levels.

Russia’s urgency for the deal can be put on strategically diversifying away from Europe as its main source of income. Recent Ukrainian events have also added to this, where Russia’s stature in European and Western politics has taken a large toll.

The impact on the global gas markets is significant. China is paying significantly less for the gas than Europe is. This has caused one of the largest buyers of LNG, Japan, to reconsider where and how it purchases gas. Japanese lawmakers said they plan to lobby Prime Minister Shinzo Abe to revive a stalled Russia-Japan natural gas pipeline.

The deal also impacts US and Canadian LNG exports and investments. Asian buyers could now choose Russian pipelines rather than expensive LNG shipments. “The ultimate shape of Canada’s LNG future remains a question mark,” a report from Toronto-Dominion bank stated.

Last year, China consumed about 170 billion cubic meters of natural gas and is expected to consume 420 billion cubic meters per year by 2020.


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