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China gas deal a symbolic victory for Russia but won't leave Europe dry
by Staff Writers
Moscow (AFP) May 25, 2014


The $400 billion gas deal Russia signed with China was a symbolic victory for Moscow as it is locked in a dispute with the West over Ukraine, but the scale of the deal is not as massive as it seems at first blush, according to analysts.

The volumes to be shipped east won't cut Russia's dependence on selling gas to the West, nor would they lead to shortages in Europe.

Under the 30-year deal signed Wednesday Russia's Gazprom will begin supplying China's CNPC with up to 38 billion cubic metres of gas per year from 2018, with the agreement said to be worth some $400 billion (300 billion euros) overall.

Russian President Vladimir Putin and Gazprom chief Alexei Miller didn't lose any time in hailing the agreement which is the largest in the state-controlled gas company's history.

However analysts at Capital Economics said "the importance of the deal is largely symbolic."

The London-based outfit said "the benefits to the Russian economy from the $400 billion deal ... are likely to be smaller than most seem to think."

First the sum will be spread out over 30 years, making it an additional $13 billion in exports that reached $593 billion last year.

"Although this is significant, it is hardly a game changer," said Capital Economics.

Analysts also pointed out that the amount of gas to be delivered to China, up to 38 billion cubic metres per year, is still far behind the 160 billion cubic meters it shipped to Europe last year.

Although by signing the deal in the midst of the Ukraine crisis Moscow was seeking to signal a shift in "focus away from Europe and towards Asia .... in short, for now Europe will remain by far the most important market for Russia's energy," said Capital Economics.

The deal was signed as Europe is locked in a confrontation with Russia over Ukraine, where Brussels believes Moscow has supported separatists and worked to destabilise the Western-leading transitional government in Kiev by hiking gas prices and threatening to cut off supplies.

Europe, which depends upon Russian gas for about a quarter of its consumption has been concerned about another possible disruption to supplies that transit Ukraine, as happened in 2006 and 2009 when Moscow and Kiev argued over prices.

- 'Symbolic gesture to Europe' -

EU nations have again begun to look how they could reduce their dependence on Russian gas.

"It is more a symbolic gesture Russia sent to Europe, to say that it has other options" to sell its gas, said Guy Maisonnier, an economist at alternative energy research firm IFP EN in Paris.

However the volumes of gas Russia will be selling to China don't pose a risk of shortages to Europe, said analysts.

"That won't affect Europe's energy supply security: there is so much gas in Russia that it can very well supply not only Europe, but China and other countries as well," said Samuele Furfari, who teaches a course on the geopolitics of energy supply and distribution at the Free University of Brussels.

Moreover to ensure its energy security China insisted that its supplies will come from largely undeveloped fields in eastern Siberia, while European supplies come from fields further west.

"The Russians agreed to dedicate specific fields and new ones for the Chinese," said Thierry Bros, an analyst of European gas markets at Societe Generale.

As Europe also has dedicated, and considerably underutilised fields, Bros said he didn't see a risk to supplies developing.

"Gazprom could send us nearly double the volumes we need today without any additional investment," he added.

Fitch noted that the deal certainly "begins to give Gazprom options in where to export, the company's challenge historically has been to find ways to monetise its 23 trillion cubic metre reserves at acceptable prices -- and the best scenario for the company is an increase in production."

Although the price of gas was not disclosed, Russian officials were quick to say it is a good deal.

"Is it profitable, yes of course, one hundred percent so," said Economy Minister Alexei Ulyukayev.

Fitch estimated the price at or above $350 per thousand cubic metres, compared to $378 per thousand cubic metres for Western European customers in 2013.

Analysts at VTB Capital in Moscow estimated the breakeven price to supply China from Siberian fields at $280 per thousand cubic metres, not including tax and investment costs.

However developing the new fields is expected to cost some $55 billion, although China is expected to help finance nearly half that amount.

Analysts at Russia's Alfa-Bank thus put the breakeven price at some $440 per thousand cubic metres.

Moreover the deal is not as good as could be for the Russian budget at a time when growth has stagnated and the economy is at risk of falling into recession due to the uncertainty generated by the Ukraine crisis and Western sanctions.

In order to wrap up the decade-long negotiations Russia waived the tax on extraction of natural resources, a key revenue generator.

"Politics always comes first, Gazprom's business interests always afterwards," the Russian business daily Vedomosti noted in an editorial.

.


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