IEEJ: September 2013 All Right Reserved
Special Bulletin
A Japanese Perspective on the International Energy Landscape (143)September 6, 2013

Gazprom and CNPC Made Step Forward to Final Gas Contract
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, JapanOn September 5 in St. Petersburg where a Group of 20 Summit was under way, Russia’s
Gazprom and China National Petroleum Corporation announced that they reached a legally binding
agreement on major terms and conditions of the long-pending pipeline gas supply from Russia toChina, including the export volume and starting date, the eastern route from Eastern Siberia to China,
and the gas delivery point.
The agreement was signed in the presence of Russian President Vladimir Putin and Chinese
President Xi Jinping, indicating that the agreement was of significance to enhancing bilateral
strategic relations and that the two leaders are celebrating the agreement.
Before the agreement, Gazprom and CNPC signed a memorandum of understanding in March
this year, setting the annual gas sales volume at 38 billion cubic meters (equivalent to some 28
million tons in liquefied natural gas) (the volume could be expanded to 60 billion cubic meters in thefuture) and the starting year at 2018.
The new Gazprom-CNPC agreement at the G20 summit venue may represent a step forward tothe final conclusion of their marathon negotiations that have lasted for more than a decade. Gazprom
President Alexey Miller said, "The fact that the major terms and conditions were signed during theG20 summit indicates the parties' aspiration to successfully conclude the negotiations and sign thecontract before the end of 2013.”
Surely, the latest agreement was a step forward. But Gazprom and CNPC will have to resolve amajor challenge before reaching the final contract. The challenge is an agreement on the price. The
largest factor behind their prolonged “marathon negotiations” has been that they have failed to agree
on the price.
In proposing the price, Russia has taken into account balancing the price with that for gas
exports to Europe and costs for pipeline construction and upstream development for exports to China.
China for its part has given top priority to domestic gas development, secured pipeline gas supply
from Turkmenistan and Myanmar and attempted to expand LNG procurement, sticking to a lower
price for Russian gas that must vie with China’s competitive domestic coal.
It has thus been very difficult for the two parties to reach a compromise on the price. Their basic1

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relations have remained unchanged, indicating difficult negotiations toward the goal of reaching thefinal contract by the end of this year. On the occasion of the latest agreement, Gazprom refused toaccept the adoption of U.S. Henry Hub price factors as requested recently by China for setting theprice for the Russian gas exports to China. Twists and turns are expected before any agreement isreached on the price. No optimism can be warranted about the final contract.
While the basic relations between Gazprom and CNPC have remained unchanged, there have,
however, been remarkable situational changes and new undercurrents.
First, the latest Gazprom-CNPC agreement was announced at the G20 summit venue. At a time
when Russia is disputing with the United States over the Snowden problem and possible militaryinterventions in Syria, Russia might have acknowledged that a message indicating its enhanced
cooperation with China, which has a sensitive distance and a strategic relationship with the UnitedStates in the Asia-Pacific region, would be important not only from the viewpoint of energy
problems but also from the viewpoints of international relations and geopolitics. Unless the basic
U.S.-China-Russia relations change dramatically, the momentum may continue for Russia toenhance relations with China.
Second, we should pay attention to the fact that circumstances for Russia’s external energy
strategy have remained severe or grown severer. Russia’s decisive weak point is that the Russian
economy depends heavily on the oil and gas sector and its exports and on Europe for most of therevenues from the sector’s exports. At a time when the European natural gas market (demand) has
shrunk due to economic deterioration under a credit crisis and competition from coal and renewableenergy, Russia has no choice but to enhance its “Look East” policy to explore the Asian market anddiversify oil and gas export destinations. While negotiations on the final contract for gas exports toChina are difficult, any progress toward the final contract can contribute to Russia’s major objectiveof diversifying export destinations and check the European market. Even within the Asian market,any progress or any signal of progress in Russia’s negotiations with China may back up Russia in its
negotiations with other major Asian energy importers including Japan and South Korea.
Third, Gazprom, though having monopolized Russia’s gas exports, has faced competition fromnew players including Rosneft and Novatek in gas exports since early this year. In this respect, it
may be significant for Gazprom with the monopolistic right to make progress in dealing with Asiancountries.
Fourth, China has recently demonstrated what can be taken as new aggressive moves for its
natural gas import strategy. For example, CNPC on September 5 announced its official agreement toacquire a 20% stake in Novatek’s Yamal LNG project.
How Gazprom and CNPC will deal with each other toward the goal of producing the final
contract within this year will attract global attention. Particularly, we may have to pay attention toGazprom’s strategy and decisions since CNPC has little chance of finding any need for its major
concession.
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