China And Russia Rekindling Past Close Ties With Expected Historic Energy Pipeline Pact

As the West has pulled away from Russia in recent months, China has crept closer.

Following a slew of Russian-Chinese trade agreements over the past decade, the two countries are expected to sign a natural gas pipeline deal next week that would secure a huge new market for Russia and guarantee China a long-term energy source, and one more environmentally friendly than coal.

“It’s what everyone has been waiting for. That’s the start of expanding their relationship,” Eurasia Group analyst Emily Stromquist said.

The deal is expected to include a 30-year delivery contract between Russia’s state-operated Gazprom and China’s state-owned CNPC for 38 billion cubic meters (bcm) of natural gas per year, with the potential to expand to 61 bcm. Construction would begin by the end of 2014 for the pipeline to begin operating in 2018.

Earlier this week, Russia’s Deputy Energy Minister Anatoly Yanovsky said the long-term deal that has been discussed for 10 years without resolution is 98 percent ready, needing only the two countries’ leaders’ signatures. Outside the EU, China is Russia’s biggest trading partner.

Russia’s intensified desire to secure a major Asian export market and China’s energy policy goals and commercial factors make the deal “highly likely” or about 80 percent likely to go through this time, according to analysts from the Eurasia Group, a consultancy.

To combat its desperate air pollution problem, China wants to shut down coal-fired power stations and increase natural gas consumption by 11 percent this year alone, according to a report by CNPC’s Economics and Technology Research Institute.

“Given what Russia can produce, there’s gas to go around from Siberia,” Stromquist said.

And China has “such anticipated growth in gas consumption they need all the potential sources they can get,” added Leslie Palti-Guzman, also an analyst for Eurasia Group.

The deal would be “unprecedented” in the Chinese and Russian gas industries, Stromquist said.

The Soviet Union recognized the People's Republic of China, a fellow Communist regime, the day after it was proclaimed in Beijing in October 1949 and invested in more than 160 industrial projects in China. In the early '50s, Moscow and Beijing backed North Korea in its war against South Korea, the United States and other Western nations.

That relationship turned sour a decade later, as each nation sought supremacy in the Communist world. Diplomatic dialogue between them did not resume until 1982.

In 2001, Russian President Vladimir Putin and China’s then-President Jiang Zemin signed a pact to defend mutual interests and boost trade, and in 2004, Gazprom and CNPC signed a partnership deal that committed them to examine issues related to arranging natural gas delivery to China from Gazprom. Since that agreement, China has imported gas from Turkmenistan, a former Soviet republic in Central Asia.

Putin and China's then-President Hu Jintao agreed to extend energy cooperation in 2006, still negotiating the gas pipeline, and in 2007, Hu visited Russia and signed commercial deals with Putin worth $4 billion. Putin said bilateral trade grew fivefold from 2000 to $30 billion in 2007.

In 2009, Russia and China signed a deal to build an oil pipeline to China. Under the pact, 300,000 barrels of Russian oil per day would flow for 20 years in exchange for a loan to Russian companies Transneft and Rosneft for pipeline and oil fields development. The production began in 2011.

The two nations’ gas industries have had a harder time hammering out deals, as oil deals tend to require fewer years in commitment.

The price tag for the expected gas pipeline deal has not been announced, but Russia is expected to offer concessions to China for prepayment from CNPC to help fund pipeline construction.

Stromquist said she doesn’t think the deal would further strain China’s relations with Japan because she thinks they will continue to sign energy contracts. The two countries have discussed energy deals in the past despite bitter differences on other issues.