Russia and China made waves in the global natural gas market today (Wednesday) by finally closing a 30-year deal after nearly a decade of negotiations.
Beginning in 2018, Russia will provide China with 38 billion cubic meters of natural gas annually from its huge fields in Siberia worth about $400 billion over the 30-year life of the contract.
The deal will require the construction of a vast new natural gas infrastructure, with Russia expected to spend $55 billion and China $20 billion.
"This is the biggest contract in the history of the gas sector of the former USSR," declared Russian President Vladimir Putin after the agreement was signed in Shanghai between Gazprom OAO (OTCMKTS ADR: OGZPY) and China National Petroleum Corp (CNPC).
The announcement comes amid recent shifts in the European natural gas market away from Gazprom in favor of more imported LNG (liquefied natural gas) and political tensions between Russia and other European countries over the annexation of Crimea and other threatening moves toward Ukraine.
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Money Morning Global Energy Strategist Dr. Kent Moors said Russia had two objectives in becoming a much bigger player in China's natural gas market.
"They wanted to move Gazprom revenues, essential to Russia's central budget, from a politically insecure European direction to a more amenable Chinese one," Dr. Moors said. "And they wanted to outflank U.S. intentions to use LNG exports as a weapon in lessening Moscow's influence over both the European and Asian markets."
One part of the deal that was not disclosed was how much China will pay, although President Putin did say the natural gas price would be tied to the price of oil, which is how Gazprom's deals with Europe are structured.
The haggling over price was why the negotiations had dragged on for years. In the accompanying video, Dr. Moors discusses why the time was finally right for this deal to happen, which country had the upper hand, and how it will affect the natural gas market in Europe.
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