Russia Nears Completion Of Second "Holy Grail" Gas Deal With China

Tyler Durden's picture

Six months ago, something few had expected would take place in 2014, or even in the coming years, happened: under Western pressure and out of a desire to diversify away from an increasingly hostile European market, Russia signed the so-called "Holy Grail" gas deal with China, pivoting away from the west and toward with Beijing.

As part of the deal, the two nations reached a $400 billion agreement to construct the Power of Siberia pipeline, which will deliver 38 billion cubic meters (bcm) of gas to China. The compromise was a lower price than Gazprom would have otherwise hoped for, however in taking a cue right out of Amazon, "Russia would make up in volume what it lost in price." This eastern route will connect Russia’s Kovykta and Chaynda fields with China, where recoverable resources are estimated at about 3 trillion cubic meters.

And then today, with little fanfare, Russia's president Putin - whose economy is said to be reeling as a result of a plunging currency, paradoxically something Japan would love to be able to achieve on such short notice - told the media ahead of his visit to the Asia Pacific Economic Conference on November 9-11, that Moscow and Beijing have agreed many of the aspects of a second gas pipeline to China, the so-called western route, or as some already are calling it, the "second holy grail."

We have reached an understanding in principle concerning the opening of the western route,” Putin said. "We have already agreed on many technical and commercial aspects of this project laying a good basis for reaching final arrangements,” the Russian President added.

As RT reports, the opening of the western route, the Altai, would link Western China and Russia and supply an additional 30 bcm of gas, nearly doubling the gas deal reached in May.

Once the Altai route is completed, China will become Russia’s biggest gas customer, able to receive up to 68 bcm of gas annually, surpassing the 40 bcm Russia supplies Germany each year.

 

Furthermore, now that the western embargo against Russia has made any ongoing cooperation between the western majors and Russia, especially in the Arctic region, virtually impossible if only for the time being, Russia has no choice but to entice China to accept the part of the provider of capital investment and technical know how (arguably reverse engineered from the best western firms). Which is why Russia has already offered Chinese companies a stake in large energy fields. In September, Russia’s largest oil company, Rosneft, offered China a share in its second-largest oil field, Vankor in the Krasnoyarsk region in Eastern Siberia. The area is estimated to have reserves of 520 million metric tons of oil and 95 billion cubic meters of natural gas.

“We have built and put into operation an oil pipeline from Russia to China and concluded agreements providing for the increase in crude oil supplies,” Putin said.

 

China will participate in joint exploration and extraction of crude oil and coal in Russia, and work on a jointly funded oil refinery in China has started.

And while Putin will be planning how to further expand the Russia-China energy symbiosis without losing too much of his own leverage, he will be joined by Russia's Foreign Minister Sergey Lavrov, who will reportedly meet with his US counterpart John Kerry. Judging by the recent escalation in Ukraine, the two will have much to discuss.

And yet, it is increasingly the case that Russia is happy to leave the west and its petrodollars behind (something Obama is hardly excited about), instead chosing to be paid in Gas-o-yuans or rubles.

“Strengthening ties with China is a foreign policy priority of Russia. Today, our relations have reached the highest level of comprehensive equitable trust-based partnership and strategic interaction in their entire history. We are well aware that such collaboration is extremely important both for Russia and China,” Putin President said.

And as Europe slowly slides into depression having lost a major trade partner, China's trade with Russia, and obviously vice versa, is surging: overall trade between Russia and China increased by 3.4% in the first half of 2014, reaching $59.1 billion, and the two neighbors expect annual trade to reach $200 billion by 2020. China is Russia’s second-biggest trading partner after the EU.

And just in case the two host central banks opt out of wiring or reciving USD-denominated payments, or are prohibited to do so should SWIFT escalate and expel Russia from the organization, recall that the central banks of the two countries recently signed a three-year ruble-yuan currency swap deal worth up to $25 billion, in order to boost trade using national currencies and lessen dependence on the dollar and euro.

Said otherwise, front page coverage of Russia, and its Chinese pivot, may have slowed down in recent weeks, but the motions behind the scenes are anything but over. And while the developed world is increasingly withdrawing from trade with itself and the BRICs, instead relying increasingly more on outright currency devaluation to boost "wealth", it is the two superpowers of China and Russia that are approaching the future the right way. The "exorbitant privilege" of having their own reserve currency will arrive in due course.