Gas deal with Russia offers longer-term security

Pact will give China a stable energy source and a stronger hand in talks with other suppliers

China has signed a series of energy deals with Russia that will ensure secure supplies for the world's second-largest economy.

"This is a historic moment for these two giant economies, which have formed an alliance for energy cooperation that can maintain a regional balance and avoid intervention from the United States in Asia," said Han Xiaoping, chief information officer of China Energy Net Consulting Ltd.

During Russian President Vladimir Putin's two-day visit to Shanghai, Chinese and Russian officials announced a comprehensive energy partnership that will deepen cooperation in oil, natural gas, coal, utilities and infrastructure construction.

Bilateral agreements were signed that are meant to ensure China has a diversified supply of energy and Russia gets more capital for its domestic development.

On Wednesday, State-owned China National Petroleum Corp and Russian's top gas exporter Gazprom OAO signed a 30-year natural gas supply contract valued at $400 billion. The deal has been in the works for about two decades.

Gazprom will supply China with 38 billion cubic meters of gas annually starting in 2018 via the eastern gas pipeline.

The price wasn't officially announced, but Reuters quoted sources saying it is about $350 to $380 per 1,000 cubic meters.

Han said the price lies between the cost of China's gas imports from Central Asia and Russia's export price to Europe.

"The price will become more acceptable in the future as the yuan grows stronger, assuming the deal runs smoothly for 30 years," he said.

More important, the price will help China in future negotiations with other gas suppliers, including liquefied natural gas producers, according to Han.

"China's imported LNG price is higher than the deal price with Russia," he said.

The price agreed to with Russia "will give China more clout in bargaining with other suppliers in the future", he said.

Other Asian energy producers can benefit from selling resources to China. Meanwhile, a secure energy supply in China will contribute to the stability of the whole Asian region, he said.

In addition to the natural gas supply deal, CNPC signed a contract with Novatek OAO for LNG purchases. The Chinese company also signed an agreement with Russia's Rosneft OAO for crude oil supplies for their joint venture refinery in northern China's city of Tianjin.

The other State-owned energy giant, China Petrochemical Corp (known as Sinopec), entered into a strategic cooperation agreement with Russia's OAO Sibur Holding, a gas processing and petrochemicals company.

As part of the cooperation, the parties will discuss the potential expansion of trading operations and look into collaboration opportunities in gas processing and petrochemical projects.

Sinopec said this partnership will help diversify and secure the company's long-term sourcing of petrochemical products and expand its overseas footprint.

Sibur said the deal will help it maximize the efficiency of new large-scale projects and expand its competencies and distribution markets.

As part of the pact, the companies will establish a joint venture for a butadiene nitrile rubber plant at the Shanghai Chemical Industry Park. Sinopec's share in the joint venture will be 74.9 percent and Sibur's will be 25.1 percent.

The parties also signed a technology licensing agreement for the use of Sibur's butadiene nitrile rubber production technology at the new facility. Sibur's specialists will participate in establishing the new facility's production and commercial operations.

"Such technology exchanges and JV cooperation will help the Russian company expand its Asian markets and raise the competitiveness of the Chinese company in the field," said Han.

Russia-based miner En+ Group Ltd and the world's largest coal producer, Shenhua Group Corp Ltd, reached an agreement on coal exploration in the Zashulanskoye project near the Russia-China border. The two said they anticipate gaining the approval of authorities within two years.

As a coal-rich country, Russia will help China to diversify its resource supply. This cooperation is a major aspect of Shenhua's overseas expansion, which is in line with China's strategic resources policies, said Deng Shun, coal industry analyst with Shanghai-based energy consultancy ICIS-C1 Energy.

It is Shenhua's first coal project in Russia. In addition to cooperating in traditional energy, the two countries also have huge potential for joint work in alternative energy and renewables including solar and wind power, said Xia Yishan, senior research fellow at the China Institute of International Studies.

He said China's advanced technology in solar power plants can benefit Russia.

Evgeniy Konygin, chairman of energy policy and utilization with the Russian Federation League of Industrialists and Entrepreneurs, said the two countries should cooperate on alternative-energy projects, an area where China has many technological advantages.

China's State Nuclear Power Technology Corp has said it plans to cooperate with Rosatom State Atomic Energy Corp for establishing floating nuclear power plants, an area where Russia has high levels of technology and vast experience. Guo Haitao, associate dean of the School of Business Administration at the China University of Petroleum, said it is promising that China and Russia have taken a giant step in energy cooperation. However, they need to establish clearly each side's rights and responsibilities.