Putin Courting Chinese Gas Sales Stuck With EU for Decade

  • Gazprom sales to China won't beat Germany's in next 10 years
  • Russia's share of EU gas market to stay at 25-35% through 2025

Russian President Vladimir Putin may flirt all he wants with China but he’ll probably have to play nice with Europe and wait at least a decade until Asia becomes his biggest natural gas buyer.

Putin’s desire to replace Germany after a relationship lasting almost half a century has been stunted by slowing Chinese growth and will only be realized after 2025, according to the median of 14 analysts surveyed by Bloomberg News. Political tensions between Russia and Europe, which gets about 30 percent of its gas from the former-Soviet nation, will do little to affect the interdependence, they said.

Russia clinched its first-ever gas accord with China last year as relations with the European Union soured over the conflict in Ukraine and 11 months before the 28-nation bloc filed an antitrust case against state-run Gazprom PJSC over pricing in eastern Europe. The Moscow-based company, which is preparing two more deals that would see China represent more than 70 percent of Gazprom’s current exports to the EU, has to submit a formal response to the objections on Monday after submitting a draft settlement earlier this month.

“China’s economic slowdown has put the nail in the coffin of Putin’s much-coveted Asia pivot well before it even took off,” Sijbren de Jong, an analyst at the Hague Centre for Strategic Studies, said by e-mail. The rebuff explains why Gazprom “is starting to play nice” with the EU, he said.

The settlement proposal wasn’t the only cozying up to Europe by Gazprom this year. As further Asian deals were delayed, the company held its first-ever gas auction for European traders in early September after decades of resisting sales not linked to oil prices under long-term contracts. It also signed accords with five European companies to double the capacity of its only pipeline directly to Germany. Russia on Friday reached an agreement on gas supplies to Ukraine through March.

“Europe will probably remain the most important outlet for Russian gas,” said Marco Giuli, an analyst at the Brussels-based European Policy Center. “The current legal disputes only mean that this relation will work in a different way from the past.”

Russian gas supplies to China will exceed 20 billion cubic meters (0.7 trillion cubic feet) in 2023 at the earliest, according to eight of the 14 respondents in the survey. That’s about 10 percent of Gazprom’s exports westward and would make the Asian nation its biggest customer after Germany, Turkey, Italy and Belarus.

Russia plans to invest $55 billion in a new gas link to China from East Siberia and two fields to feed it. The company’s free cash flow from deliveries to China won’t reach the European level of about 30 percent of the gross price until 2028 at the earliest, Maxim Moshkov, an energy analyst for UBS Group AG in Moscow, said by phone. There’s a chance that Russian supplies to China will never be as profitable as those to Germany, Thierry Bros, an analyst at Societe Generale in Paris, said by e-mail.

China will always demand prices below Germany’s and is unlikely to let Gazprom’s market share rise above 20 percent, Alexei Kokin, an energy analyst at UralSib Financial Corp. in Moscow, said by e-mail. 

Gazprom will be able to fend off most competition in the EU, including from U.S. liquefied natural gas, keeping its share in the region’s gas market at 25 to 35 percent for a decade or longer, 10 of the analysts in the survey said.

“There will always be countries that are prepared to pay a higher price to avoid Russian gas, but in general consumers want to buy the cheapest supply," James Henderson, senior research fellow at the Oxford Institute for Energy Studies, said in an e-mail. “So Gazprom needs to develop a strategy that can allow it to find where the market balances and allows it to optimize its position."

European gas production will decline in the long term and shale gas will likely be slow to develop, given environmental concerns and public opposition, according to Armelle Lecarpentier, chief economist at the International Center for Natural Gas Information, or Cedigaz. While Europe will seek to reduce its dependence on Russia, there are commercial, political and security obstacles, she said.

“Even if it does not succeed in increasing its market share in Europe, Russia should preserve its current predominant position as a long-term supplier,” she said.

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