Wednesday, 21 May 2014
30% discount? The Russia/China gas deal
After all, the Ukraine from whence problems came, is a big customer of Gazprom so the fact that Russia is so willing to use it as a tool of state power when it needs to is not lost on the Chinese.
Russia is only in China because it is so dependent on Germany and the West as customers which is now at odds with Putin's foreign policy.
So, the Chinese, being ever keen on a negotiation suggested that a long-term discount of half of the market price should be in order.
Moscow was shocked, I note, has not yet invaded Ukraine despite all the activity that would suggest it was strongly considered - or still maybe.
Then yesterday Putin was finally in China to conclude the deal. A mega deal it is too However, it was signed quite quickly which suggests to me the Chinese were able to get the deal they were looking for. My guesstimate is that the price to benchmarks will be around the 30% mark. It will be hard to ever know as Chian will make up front payments using its huge cash reserves, which clearly has a big impact on the overall long-term real price calculation.
This is much worse than Russia could do in Western Europe, even if the deal is better, Russian gas is sold for not too far off market price in Europe ( ND, can you enlighten further here in the comments?).
So politics has triumphed over business for Putin, a rare occurrence indeed. This deal won't do too much for Russia's long-term budget that currently needs hydrocarbons at above world prices to balance.