Gazprom Deal With China May Cost Russia

By Andy Tully:

Russia’s deal to sell an estimated $400 billion in gas to China may require an initial investment from Moscow.

Vladimir Putin, Russia’s president, told an energy convocation in Astrakhan, Russia, on June 4 that Gazprom, Russia’s government-owned gas company, may need several billion dollars worth of new capital to build pipelines and tap new fields to keep the gas flowing.

Putin gave no details, but indicated the money could come from the country’s gold and foreign exchange reserves.

Moscow estimates that the deal to sell gas to China over 30 years, beginning in 2015, could add between 0.3 and 0.4 percentage points to Russia’s economy. The central bank in Moscow says the economy is forecast to grow by only 0.5 percent in 2014.

Russia has said it intends to invest $55 billion to tap new sources of gas and build the pipeline to China’s border. The China National Petroleum Corp. will build the Chinese section.

The deal with China is certain to help Russia’s economy, which has been sluggish because of a lack of overall reforms since the breakup of the Soviet Union and, more recently, economic sanctions from the West for its invasion and annexation of Crimea in March. Investing billions of dollars in the China project is expected to cause further strain.

In part because of these sanctions, the deal with China is a way for Russia to diversify its customer base if EU countries succeed in weaning themselves from their current heavy reliance on Russian gas. Still, May gas deliveries to Europe were up more than 10 percent over levels from one year ago, Gazprom CEO Alexei Miller said June 3.

But that may be because European clients are stockpiling gas for fear of a cutoff in case Ukraine cannot maintain its payments to Gazprom. EU countries get about 30 percent of their gas from Gazprom, and half of that is piped through Ukraine.

If Ukraine runs out of gas, it may tap its pipelines for gas destined for Western Europe, as it did in 2006 and 2009.

This piece is cross-posted from OilPrice.com with permission.