China Signs Natural Gas Contract with Russia

According to the news agency Reuters, China signed a $400 billion, 30-year deal with Russia to bring Russian natural gas to China beginning in 2018.

The agreement is for 38 billion cubic meters (about 1.34 trillion cubic feet) of gas annually, which is about 20 percent of Russia’s European gas sales. The deal is expected to further the strategic goals of Moscow and Beijing to diminish the status of the U.S. dollar by conducting world trade in critical commodities such as oil and gas using other currencies.

“This is the biggest contract in the history of the gas sector of the former USSR,” Russian President Vladimir Putin told reporters in Shanghai.

The pipelines, pump stations, and processing plants necessary to transport the world’s largest infrastructure project will be built jointly by the two countries. According to Washington Times,  the cost of building the infrastructure is expected to top $70 billion. Russian energy giant Gazprom plans to spend $55 billion and hire 11,700 people to build the pipelines, gas processing plants and other infrastructure. China may make an advance payment of as much as $25 billion toward the needed infrastructure in Russia. Further, the Chinese government is responsible for the pipeline on its own territory and will spend at least $20 billion on its construction. Russia and China are also expected to begin talks on a second pipeline to the west of the initial route.

The infrastructure being built will make Russia’s gas not only available to China, but also to Russia’s Pacific ports, where it can be liquefied and sold to Japan, South Korea and other Asian markets. The plan includes a liquefied natural gas plant in Vladivostok on the eastern coast of Russia that would provide liquefied gas to major port cities in China and to the rest of Asia. This project provides competition to U.S. exports of LNG to the Asia-Pacific. However, since both the Russian infrastructure and U.S. LNG plants are years away from completion, it is not clear how big the threat to North American projects is.

This gas deal provides Russia with a substantial stimulus for its economy, especially in its poorer regions in Siberia and the Far East, particularly since nearly all the steel pipe and other components will be manufactured in Russia.

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