Russia looks east as China link threatens to inflame Europe’s gas crisis

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It is thought there is enough gas in the Yamal area to supply both markets, but Russia could use the diversity of the customer base to its advantage. 

“The question is, would it [increase production to serve both centres] or would it optimise between the two – sell into the market which is going to pay the higher price,” asks Tomas Marzec-Manser, head of gas analytics at ICIS. 

China can afford to buy greater amounts. It has been purchasing pipeline gas through long-term contracts linked to oil prices – a common feature of the international gas industry. Thus the amount recently paid is less than Europe, which relies more on short-term contracts and the spot market where prices are soaring. 

In October, China was paying $4-$7 per Mmbtu (£3-£5), even as prices in Europe climbed above $20 per Mmbtu, data from ICIS shows. 

“It’s a gradual change of customer base, which is something that Europeans ought to keep in mind,” says Filip Medunic, at the European Council on Foreign Relations think-tank. 

If it gets to the point where Russia can afford not to supply Europe and wants to use gas supply as a political tool, he notes, “that’s really dangerous, because that’s super difficult to resolve.”

Medunic urges Europe to make sure it has the right contracts in place so “we don’t end up again in a situation in winter where there isn’t enough and we have to ask for more.”

Gabuev also warns of the potential risks for Moscow becoming too reliant on Beijing. Australia has recently seen an unofficial block on some imports into China in what was perceived as political retaliation. 

While Power of Siberia 2 has been discussed for years, it has gained fresh impetus amid tensions with the West. Critics accuse Russia of compounding Europe’s energy crisis, arguing Putin is withholding extra gas supplies to pressure German regulators into starting up the Nord Stream 2 pipeline under the Baltic Sea. 

According to reports, Putin and Xi discussed the pipeline on a call on December 15 while the Russian president later hosted Ukhnaagiin Khürelsükh, the president of Mongolia, where the pipeline will travel through. 

Meanwhile, Gazprom, Russia’s state gas giant, is conducting a feasibility study for the pipeline which would be built alongside the China National Petroleum Corporation. Platts Analytics’ base case expects it to go ahead, with flows to begin as soon as 2027.

With the gas supply deal behind the existing pipeline having been signed shortly after Russia’s Winter Olympics in 2014, this year’s contest in Beijing may once again prove the catalyst for a deal.  

“We don’t know whether the contract will be ready by then,” says Gabuev. 

“But I think that there’s a lot of political and commercial incentive to sign it sooner rather than later in the first face-to-face encounter in nearly three years.”

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