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21 May, 2014 15:07

‘EU has no reason to worry Russia-China gas deal will affect supplies’

‘EU has no reason to worry Russia-China gas deal will affect supplies’

The historic China gas deal gives Russia another source of export revenue from a set of fields that would never target the European market, an expert on emerging markets energy research Stephen O’Sullivan told RT.

RT:Is this just anenergy contract, or something more?

Stephen O’Sullivan: It is first and foremost an energy contract. Of course it’s a large amount of gas for a long period but it also plays in the current geopolitics around Russia, Ukraine, China, etc. It is a deal that has been under negotiation for at least a decade, and I think it was even quite longer. The fact that it comes to fruition now is not coincidental. It’s good for Russia to have other options to sell gas to, to open its markets to Asia. In itself the Asian, the Chinese market for gas in particular, is very strong and growing one. And it is very important for Russia to diversify its export options, particularly for the fields in Eastern Siberia, which do not make any commercial sense to sell into the European market.

RT:How stable is this relationship with China though? Isn't it just one of necessity?

SS: There is an element of necessity in the relationship. They do have common interests, they trade, they sell energy from Russia, they have been selling oil from Russia to China. So now they are adding gas to that. There is an arms trade between the two countries, there are businesses between the two countries, but at some degree a lot of observers will see this as a marriage of convenience. It suits Russians to have an alternative purchaser of gas in very large volumes. It suits the Chinese, of course, to have a pretty secure supply of gas via a pipeline from one of its largest neighbors as well. LNG (liquid natural gas) is a very important import into China but there are obviously supply security concerns [if it is shipped by sea] further down road, and that’s why pipeline gas is a very attractive option for a large consuming country like China.

RT:The sum we've been given is 400 billion dollars, astounding in itself. Does that sheer number tell you anything?

SS: It gives us a clue, if it is right about the price that is being secured by the Chinese buying gas from Russia, somewhere around of 350-370 dollars for 1000 cubic meters, which is slightly lower than the people might have been expected, but it has to be competitive with future Chinese import options which will include what is today looking like relatively cheap gas in liquid gas form from the US, gas potentially from East Africa and certainly gas from Australia. At the same time it has to pay for pipelines and field development. There is no point in doing a deal unless you can get some sort of return on the investment you are making. Strategically it makes sense for Russia to want to have another option, strategically it makes sense for Russia to target the Asian market but I think ideally they would like to make some sort of return. At the same time it is fair to say the Chinese side are going to have an upper hand, given the current problems with Russia and Europe over Ukraine. I think that have been a part of the discussion going on over the past couple of months and that culminated in today’s agreement.

RT:The President of the European commission has just sent Vladimir Putin a letter, saying he hopes Russia doesn't renege on its gas obligations to Europe. What reason does the EU have to worry?

SS: Perhaps, the EU is just trying to look relevant. I think in reality this is gas from East Siberia that is going to China, a completely new province of gas development, a completely new pipeline, a completely new customer. It does not affect existing and potential future supplies of gas to Europe from West Siberia, Yamal etc. The two are distinct areas of Russia. The East Siberian gas would be commercially impossible to sell into Europe, they could not get the price they would need to develop it from European customers. And it would be prohibitively expensive to build a pipeline from West Siberia to East Siberia or to China, so it would make no sense for China to buy that. Russia has two very logical constituencies here: Europe for the West Siberian gas, China - for the East Siberian gas. I am sure it is in Russia's long-term interest to maintain good relations commercially with both its large customers in Europe and now in China.

RT:On the other hand, the EU and the US have alienated Russia to a great extent over Ukraine. Didn't they effectively push Moscow towards Beijing?

SS: You could say that, although I think Moscow was moving into the direction of Beijing anyway, and as a sensible gas supplier it is good for Russia to have a number of export options. I think what happened is that the timing has been pushed and accelerated by the current problems between Europe and Russia. It has incentivized Russians to do a deal and perhaps to accept a slightly lower price than they might have expected. Though those terms are confidential right now, I am sure the Chinese would have used it gently in their negotiating position, that it's in Russia's strategic interests to be seen to have other options on the table. I do think in the medium term European dependence on Russian gas is going to go down, but I do not think it can be eliminated completely. This just gives Russia another source of export revenue from a completely different set of fields that would never target the European market.

The statements, views and opinions expressed in this column are solely those of the author and do not necessarily represent those of RT.