Irkutsk
Ulan-Ude

Blagoveshchensk
Chita
Yakutsk

Birobidzhan
Vladivostok
Khabarovsk

Magadan
Yuzhno-Sakhalinsk

Anadyr
Petropavlovsk-
Kamchatsky
Moscow

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"Contract of the Century"

Since 2018, Russia will start supplying natural gas to China, planning to reach a figure of 38 billion cubic meters of gas annually

"Contract of the Century"

Russian-Chinese negotiations, painfully lingering over 20 years with varying success, finally bore fruit. The contract concluded with China is unprecedented both in terms of duration and value, when compared with contracts between the West and Russia. The amount of the transaction amounted to about 400 billion dollars, the term of the contract 30 years.

However, this "contract of the century", which attracted the attention of the whole world, for China, in addition to benefits, is fraught with certain difficulties. There are four main problems: 1. Will there be enough gas for Chinese consumption? 2. How will the difference in prices for domestic and imported gas affect the state of the market? 3. The problem of combining gas pipelines with different standards. 4. Impact of Russian gas supplies on the geopolitical situation.

Will there be enough gas?

Russia's main oil and gas fields are located not in Eastern Siberia, but in Western Siberia, the Volga-Ural region, the Timan-Pechora oil and gas province, the North Caucasus and the Caspian shelf. These deposits are the main suppliers of oil and gas products both to the domestic market of the Russian Federation and to exports to the EU and the CIS countries. Eastern Siberia and the Far East have four potentially rich oil and gas bearing areas, but in these areas the oil-bearing strata lie in the Paleozoic and Mesozoic layers and have never been developed. Despite this, it is the Kovytkinskoye field in the Irkutsk region and the Chayandinskoye field in Yakutia that should become suppliers of 38 billion cubic meters of gas annually for China. Currently, the total gas production in the Irkutsk region and Yakutia reaches 2 billion cubic meters per year. According to experts, gas reserves in these regions amount to 13 trillion cubic meters. However, the exact volumes will be known only after the beginning of the development of the above deposits.

Price does not match demand

According to the Ministry of Energy of the Russian Federation, as well as according to forecasts of the Chinese media, the price per 350 cubic meters of gas was $ 10.5 ($ 2.2 per million British thermal units) or 9 yuan per cubic meter, which, according to the Russian side, is the lowest price for foreign partners. ... According to information from open sources, the most expensive gas supplied to China today is Turkmen ($ 8 per million British thermal units), Uzbek is a little cheaper - $ 3 per million British thermal units, the cheapest gas is Kazakh ($ 3.3 per million British thermal units). Speaking about Russian gas, it is worth noting that, taking into account all markups, the price for it could reach XNUMX yuan per cubic meter.

Of course, the price offered by Moscow is lower than the prices paid by the eurozone countries. For example, in France, Germany and Italy, Russian gas is supplied at prices ranging from 415 to 455 dollars per thousand cubic meters. Nevertheless, it is worth thinking about the end consumers in China itself. In the case of households, they will most likely first think about the use of purely Chinese gas. In the case of industrial enterprises, the use of Russian gas will mean an increase in the cost of production of final products. Some enterprises, especially those sensitive to gas price increases, even expressed a desire to stop using gas in the light of price increases.

Diameter mismatch

According to the terms of the agreement, the Russian side is responsible for the development of deposits, gas processing, and the construction of a gas pipeline on the territory of Russia, PetroChina is responsible for the construction of the Chinese part of the gas pipeline, gas storage facilities and other related infrastructure facilities.

Speaking about the gas pipeline project, it should be mentioned that in the territory of the Russian Federation its length will be 800 km from Kovytkinsky to Chayandinskoye field, 1700 km from Chayandinskoye to Belogorsk, 180 km from Belogorsk to Heihe. In China, it will stretch majestically to 3060 km from Heihe through Beijing to Shanghai.

During the construction of the pipeline, large diameter pipes from 1016 to 1420 mm will be used, which is justified both from an economic point of view and from the standpoint of saving raw materials. However, the use of large diameter pipes is associated with certain difficulties for China. During the construction of the West-East gas pipeline (in China), only Chinese pipe rolling with a diameter of 1219 mm pipe was used, but the production of pipes with a diameter of 1420 mm, which will be used in the construction of a gas pipeline in Russia, still exists only on paper. In addition, there are problems associated with the organization of construction of facilities, their functioning after commissioning. Unlike China, Russia has more than a century of experience in the construction and operation of gas pipelines, and the production of pipes of diameter 1420 mm was established in the USSR, their share in the gas pipeline network of the Russian Federation is over 60 percent.

Geopolitics can not be discounted

After World War II, the traditional centers of oil production shifted from the Gulf of Mexico to the Persian Gulf, and then to Russia and the Caspian regions. In all of Eurasia, Russia today has the most advantageous position, because a quarter of the gas consumed by Europe comes from Russia. In addition, Russia is actively using its resource advantage. Three “gas wars” with Ukraine due to gas prices, as well as the annexation of the Crimea, added fuel to the fire of European discontent with “take and pay” contracts and forced European states to look for ways to get rid of Russian energy supplies. Thus, it is geopolitical reasons that influenced the fact that the Russian-Chinese negotiations, which had not been shaky or stubborn for 20 years, resulted in the signing of an agreement. 

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