On May 21st China and Russia signed a 30-year natural-gas pipeline deal that will send 38bn cu metres a year of gas from Russia to China, starting in 2018. The announcement caps a decade-long negotiation and highlights a unique convergence of commercial and diplomatic interests for both sides.

 

For Russia, the deal came at a crucial moment. Lacklustre demand and political efforts in Europe—bolstered by the Ukraine crisis—to diversify away from Russian gas are set to constrain future sales to the West. Moreover, as Australian and North American liquefied natural gas (LNG) exports are set to reach Asia from next year, Russia's window of opportunity to tap into the world's fastest-growing gas market is closing rapidly. The deal, believed to be worth around US$400bn, comes as a part of Russia's larger-scale pivot to Asia as Western economies threaten sanctions over turmoil in Ukraine.

 

Although the urgency to conclude a deal was greater for Russia, China also needs Siberian gas. Gas demand in China is set to surge on the back of an ambitious environmental agenda. Although the government is aggressively pursuing other supply options, the "Power of Siberia" pipeline at the heart of the deal is uniquely placed to supply China's north-eastern provinces, which have very few alternative sources of supply. Finally, through a deal in which China appears to have gained the upper hand, China's president, Xi Jinping, has demonstrated his ability to forge strategic economic ties with Russia advantageously. His predecessor, Hu Jintao, was notably unable to conclude such a deal.

The terms of the deal were dubbed a "commercial secret" by Russia's Gazprom, but the sale price is likely to be around US$350 per 1,000 cu metres, Gazprom's red line for the economic viability of the deal. This compares with a price range of US$350–380/1,000 cu metres that most European utilities pay Gazprom. For China, the price is slightly higher than its imports from Central Asia, but still cheaper than LNG purchased on the Asian market. The two outstanding questions are whether China provided an upfront payment to fund the infrastructure costs and, crucially, whether it will be given a stake in developing the gasfields