Russian Gazprom's gas deal with China unlikely to effect European gas supplies, says legal expert

Out-Law News | 22 May 2014 | 5:13 pm | 3 min. read

The deal China has struck to buy gas from Russia's state-owned Gazprom over the next 30 years is unlikely to effect gas supplies to Europe, despite EU concerns about energy security within the trading bloc, a legal expert has said.

The multi-billion dollar deal marks a significant shift in Russia's energy policy, as it seeks new markets for its natural resources in the face of EU sanctions imposed due to its actions in the Ukraine.

Chinese president Xi Jinping and Russian president Vladimir Putin signed the deal in Beijing, following 10 years of negotiations between the two countries. Under the terms of the agreement, Gazprom will supply China National Petroleum Corp, China’s largest oil company, with up to 38 billion cubic metres (bcm) of gas a year for 30 years, beginning in 2018, according to a report by the Financial Times. No official price has been announced for the deal, however it is believed to be worth more than $400bn, according to a BBC report.

John Gilbert of Pinsent Masons, the law firm behind Out-Law.com, said: "It has been suggested that the deal will have a detrimental effect on gas supply into Europe.  However, this is unlikely because the gas supplied to China will come from fields in the far east of Russia which could not be transported economically to Europe."

"Moreover, the deal is for the supply of 38 bcm per year, which is a relatively modest volume particularly given the other available sources of supply into Europe," said Gilbert.

"The most significant aspect of the deal is what it symbolises rather than its practical impact," Gilbert said. "As well as China opening up as a market for pipeline gas and liquefied natural gas, it emphasizes Russia’s focus turning to the East as a market for the energy that it produces. This is an ongoing process which is consistent with Russia's longstanding policy of seeking to achieve and maintain pricing parity of Urals crude oil with Brent crude oil."

Gazprom chief executive Alexei Miller described the new deal as "the biggest contract in the entire history of the USSR and Gazprom - over 1 trillion cubic metres of gas will be supplied during a whole contractual period," the BBC reported.

To meet the contract, Gazprom plans to develop the Kovykta and Chayanda gas fields in east Siberia and to invest $55bn in a new pipeline to the Chinese border, according to the Financial Times' report. It is understood that China will contribute at least $20bn of investments, though it was not clear on what terms.

Gazprom said that while the two parties have agreed on a base price, some conditions are yet to be settled. Russian energy minister Alexander Novak said that both countries would effectively subside the contract through tax exemptions, under the terms of an intergovernmental deal to be agreed by the end of the year, the Financial Times reported.

The deal between Russia and China comes in the same week as European leaders and industry stakeholders convened in Brussels to discuss issues surrounding EU energy security in the wake of its sanctions against Russia.

The European Commission is to outline  an energy security strategy for Europe ahead of the meeting of the European Council on 26- 27 June.

Ahead of the Brussels conference, European Commission president José Manuel Barroso said: "The Ukraine crisis once again confirms that it is in our own interest to choose a path towards a low carbon, competitive and energy secure European Union. Increasing our security of supply has been an overarching goal of European energy and climate policies for years - now it is time to take it one step further. "

The EU, the US and other members of the international community have imposed sanctions on a number of individuals and companies in Russia and the Ukraine due to Russia's activities in Ukraine which the EU and the US say have undermined the sovereignty of the Ukraine. Last week the EU added two companies to its sanctions list, both of which are involved in the development of oil and gas deposits.

Tom Stocker of Pinsent Masons, has previously said that "the direction of travel is clearly towards sanctioning entities in the oil and gas sector and financial services", and said that EU companies operating in Russia or doing business with Russian companies outside Russia must familiarise themselves with the law surrounding sanctions to guard against acting unlawfully.