Last month in "PetroYuan Proliferation: Russia, China To Settle ‘Holy Grail’ Pipeline Sales In Renminbi [12]," we outlined how Moscow was set to deliver some 68 bcm/y in natural gas to China via the Power of Siberia line and the "Western Route", or the "Altai" line. Here’s a quick recap:
In May, Chinese President Xi Jinping visited Moscow, where Gazprom Chief Executive Alexei Miller and China National Petroleum Corp Vice President Wang Dongjin signed a gas export deal which paves the way for 30 bcm/y to China via a new “Western Route.” Last year, the two countries ratified a "Holy Grail" gas deal for the delivery of up to 38 bcm/y over 30 years via an "Eastern Route." Also known as the "Power of Siberia" pipeline, the Eastern route was billed as the largest fuel network in the world with a total contract value of around $400 billion. Once the two pipelines are operational, China will become the largest consumer of Russian natural gas.
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Because Russia and China are set to settle gas (not to mention crude) sales in yuan, we argued that the consummation of the pipeline deals serves as further evidence of de-dollarization and the collapse of petrodollar mercantilism, the system that’s served to underwrite decades of dollar dominance.
And while data released since then shows that for the first time, Russia has surpassed [14] Saudi Arabia as the largest supplier of oil to China (further supporting the idea that the petrodollar is rapidly losing ground to the "petroyuan"), it appears that China’s economic slowdown will delay the implementation of the Atlai deal - indefinitely. Here’s more from Vedomosti [15] (Google translated):
Signing a contract with China for the supply of gas through the pipeline "Altai" (or "Power of Siberia - 2") is delayed indefinitely, told "Vedomosti" two federal officials. The growth of the Chinese economy is slowing down, China is revising the energy balance, they explain.
Growth in demand for gas in China is slowing, while due to the fall in oil prices, China is becoming more accessible LNG, for example in Australia, says analyst "Sberbank CIB» Valery Nesterov.According to BP, when in 2012-2013. Gas consumption in China has grown by 12-13%, while in 2014 the increase was 8.5% and reached 185.5 billion cubic meters. m. In the first half of 2015 the growth was only 2%, says Nesterov, in this situation, "Gazprom" will not be able to get a high price of gas, "Altai".
"Gazprom" CNPC offers a high price, explaining its high cost of construction of the "Altai". China is ready to build a gas pipeline is cheaper and offers announced an open tender to his company can participate and construction costs become transparent, "- explains the President of the Russian-Chinese analytical center Sergei Sanakoyev," Gazprom "refused, China is in no hurry.
The representative of "Gazprom" declined to comment.
China offered to supply material resources, equipment and manpower, he said in May, deputy chairman of "Gazprom" Vitaly Markelov. The need to attract them to our territory is not, was not and will not be assured in late June, Deputy CEO Alexander Medvedev.
The daily goes on to suggest that the deal may need to be negotiated at the highest level - that is, between Putin and Xi Jinping:
By the first contract "Gazprom" and CNPC agree themselves and could not (the negotiations were 10 years old), the document was signed only after the talks Russian President Vladimir Putin and Chinese President Xi Jinping, reminds one of the interlocutors "Vedomosti". Most likely, and the second contract will also require political intervention, he said.
And here's more color from the Taiwan-based, pro-China China Times [16]:
Despite strengthening political ties and military cooperation, the impasse on the gas deal suggests that the economic relationship between China and Russia is cooling, Duowei said.
On Wednesday, Chinese commerce ministry spokesperson Shen Danyang revealed that China's foreign direct investment in Russia dropped 25% in the first half of 2015 year on year. Earlier this month, China's General Administration of Customs released statistics that also suggested that trade between the two countries fell by 30.2% in the first six months of the year.
Additionally, the Moscow Times reported Thursday that weakened domestic and internal demand has seriously affected Gazprom's natural gas production, which fell by a record 19% year on year in June and 12.9% over the first six months of 2015, while export volume also dropped by 8%. In recent years, Gazprom has accounted for nearly 20% of Moscow's fiscal revenue and represented nearly 10% of Russia's GDP.
How much of this represents a "cooling" of economic ties between Moscow and Beijing and how much is simply a consequence of falling Chinese demand (a pervasive problem at the heart of the global commodities downturn) remains to be seen, but it's in both countries' best interest to strengthen their energy partnership, especially in the face of mouting tensions with the West, which is why we wouldn't be surprised to see the Altai line project back on track in relatively short order.
