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China-Russia energise relations, but gas deal still out of reach

China and Russia signed a raft of new deals during president Xi Jinping’s state visit to Moscow. The agreements promise to deepen the countries’ energy ties, but the crucial element of a proposed gas-supply deal – the price – has not yet been finalised

We didn’t come here and waste our time,” Xi told reporters after meeting with Russian president Vladimir Putin, hailing the energy agreements as a breakthrough. “Oil and gas pipelines have become the veins connecting the two countries in a new century,” said Xi.

It was Xi’s first state visit since becoming president and he was keen to ensure it was a success. Russia is the world’s largest oil producer and second-largest gas producer, yet it has struggled to make inroads with its eastern neighbour even as China’s energy needs have soared. The countries have a complex history and negotiations over energy relations have been beset by mutual distrust.

The latest round of negotiations, though, produced some concrete results, especially in the oil trade and joint investment. Russia’s state-run oil company Rosneft has agreed to increase oil shipments to China through the Skovorodino-Mohe pipeline to 31 million tonnes a year, or about 600,000 barrels a day (b/d), more than double current levels.

Rosneft and China National Petroleum Corporation (CNPC) have also agreed to jointly invest in on- and offshore Russian fields. In exchange, Rosneft will get a $2 billion loan from China Development Bank. The loan comes at a crucial time for Rosneft as it recently closed a $60bn deal to takeover TNK-BP.

The two sides did not see a similar breakthrough in long running gas-supply negotiations, though they appeared to inch closer to a deal with a memorandum of understanding outlining the basics of a 30-year supply deal. Gazprom would supply China with 38 billion cubic metres a year (cm/y) starting in 2018, eventually rising to as much as 60bn cm/y.

Gazprom has given up on its preferred supply route through the western Chinese province of Xinjiang, where it could have supplied China from the same gasfields it supplies Europe. Instead Gazprom has agreed that any future supplies would be sent via China’s preferred eastern route, from as yet undeveloped fields in East Siberia into China’s northeastern provinces, where demand is far higher.

The two sides, though, have still not agreed on a price for the gas supplies, which has held up negotiations for more than a decade. Russia wants China to pay a similar price to its European customers – roughly $300 per 1,000 cm, but China has refused. The two sides hope to seal a deal by the end of this year, but as China continues to invest in new gas projects from Mozambique to Australia and beyond, the clock is ticking on the deal.

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