Russia and China have just concluded a major gas deal. China will purchase 38 billion cubic meters of natural gas from Russia for 30 years, potentially worth $400 billion.  The sales won’t start immediately – new gas-fields in Eastern Russia need to be developed and pipelines have to be laid down first. But four year from now, in 2018, the gas will begin to flow.
Natural gas is a major export for Russia. Exports to Europe in 2012 were an estimated $66 billion – more than 10% of Russia’s entire exports.  Russia (and USSR earlier) has been supplying gas to Western Europe since the 1980s. However, given the events in Ukraine, there is now talk of Europe reducing its dependence on Russian gas. Imports of shale gas from the U.S. and developing shale gas reserves within Europe are being discussed. Unlike petroleum, natural gas cannot be freely bought or sold without costly infrastructure such as pipelines and Liquefied Natural Gas (LNG) terminals. Therefore, any meaningful shift by Europe will hit Russia’s exports.
Clearly, Russia needs to reduce its dependence on a single market and tap additional markets. The deal is a big step in that direction.
China gains by getting a large, dedicated supply of a clean fuel. China’s premier Li Keqiang has spoken of a ‘war on pollution’ – using more natural gas instead of oil or coal will help.
This deal has implications for Russia’s energy trade, Asia’s energy supplies and the global gas market at large.
1. This is the first time Russia will look for new markets for a key resource.
2. After China, it will be natural for Russia to look further east to the other energy hungry Asian economies for similar deals – Japan and South Korea in the immediate neighborhood and a bit further off, India. Such cooperation will also require large infrastructure investments from the Russian side – particularly LNG terminals. That will provide business for all sides, Russian as also the energy importers who will need to invest also to ensure the financial and operational viability for these projects.
3. This is an opportunity to bring down natural gas prices. Iran and Russia have the world’s largest and second largest reserves of natural gas: Russia has less than 5% of the global LNG trade while Iran is absent thanks to the many sanctions imposed on it since 1979. Qatar, third in reserves, is the biggest player in the LNG business with one third of the global market. It sells to top importers such as Japan, India, South Korea, UK, Taiwan, China, Italy and Spain. If Russia can be brought into the world LNG market, currently dominated by countries with smaller gas reserves, it will be good for importers such as India (Tables 1 & 2). 
|Table 1: Top Natural Gas Reserves Globally (2012)|
|Country||Natural Gas Reserves|
|Figures in Trillion Cubic Meters|
|Table 2: Top LNG Exporters Worldwide (2012)|
|Figures in Million tonnes|
4. In the long term, this deal could perhaps see Russia and China shift away from the dollar – even though nothing has been mentioned about that. Russia and China already have extensive trade (approximately $90 billion) in China’s favor and can potentially use the yuan for this trade. 
This is a clear opportunity for India to secure its energy supplies. India is short of natural gas; domestic supply is less than half the demand. LNG can be imported, but the high prices of the past couple of years makes it too expensive for critical uses such as power generation. Predicting energy prices is difficult, but certainly, if world’s second largest gas reserves start pumping into the market, prices should drop, making it a good deal for India. Both India and Russia will have to invest seriously in the multi-billion dollar infrastructure required for the export of LNG, but some already exists. India already has 4 operational LNG terminals, including the currently idle Enron LNG terminal at Dabhol. More will be needed. Gazprom is planning an export terminal in Vladivostok, on the Pacific Coast. It will also need early, long term purchase agreements before doing so.
There are two serious hurdles at this moment.
1. Given the events in Ukraine, Russia’s energy sector may face sanctions from an enraged NATO. This means that Indian public sector companies with energy interests overseas such as ONGC, GAIL and Bharat Petroleum will not be able to sign fresh deals with Russia. ONGC and BPCL have oil and gas fields across the world which could face sanctions, and GAIL recently signed LNG sourcing contracts with two U.S. companies. 
Of course India can use another PSU – Hindustan Petroleum, which has almost no presence outside of India – for any long term deals with Russia. HPCL has not developed businesses outside its traditional areas of petroleum-refining and retail – an India-Russia energy deal will help the company grow. This could be beneficial for India’s energy security and for HPCL’s shareholders, both.
2. A gas deal with Russia will jeopardise India’s budding energy relationship with the U.S. The U.S. doesn’t yet have a free trade agreement with India, and gas exports need clearance from the Department of Energy on a case-by-case basis. India (through GAIL) has already signed two natural gas import deals with the U.S. and delivery will start as the projects get completed i.e. 2016-17. 
Should India consider such a deal with Russia? The U.S. uses trade related measures/sanctions to further its foreign policy goals. Russia has been a reliable supplier of energy to Europe for over 25 years and has a long-standing trade relationship with India. For India then, Russia as an energy partner, may prove more reliable than the U.S.
Amit Bhandari is Fellow, Energy & Environment Studies, Gateway House.
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