Does Russia’s gas deal with China change things for the EU?

News just out is that Russia and China have finally signed a gas deal, the negotiations of which have been going-on for a decade. (As the picture above, taken from a Gazprom investor presentation showed, this is something Gazprom has been targeting).

This is a pretty surprising turnaround given that every news outlet was reporting overnight that Russian President Vladimir Putin had failed in his attempts to finalise the deal in his current trip to China which ends tonight.

The key points of the deal are follows:

• The contract will be over 30 years and is unofficially estimated to be worth $400bn (19% of Russian GDP).

• It will see Gazprom supply up to 38 billion cubic meters (bcm) of gas to China per year from 2018. Once further pipelines are complete, this could be expanded to 61 bcm per year. As a comparison, over the past four years Gazprom has exported an average of 157 bcm per year to Europe (including Turkey).

• No official price has been revealed but the biggest sticking point has been that China believed Russia’s price demands were too high. It will be interesting to see if Russia gave in on this point.

• This deal has proved increasingly important for Russia as it looks to shift it’s away from relying on European demand for its energy exports.

What does this deal mean for the EU?

• In the short term, not too much. The economic links between Russia and Europe will continue to be significant and they will continue to be reliant on each other when it comes to energy (the former to sell the latter to buy).

• The deal will not be in place until 2018 and even then will only see Russia selling a fraction of its gas exports to China every year, exports to the EU could still well be two to four times the size.

• For these reasons, it is unlikely to change the potential impact which EU sanctions would have on Russia. Although of course Russia remains relatively unconcerned by such threats when it knows of the huge divides within the EU on the issue.

• All that said, it is symbolically important and could have longer term impacts. It highlights Russia’s desire to move away from links with Europe. Combine this with Europe’s desire to increase energy security and the relations between the two sides could become increasingly cold and distant. Although, some countries due to geographical proximity (Bulgaria/Hungary) or due to long standing economic links (Germany) will surely continue to have good relationships with Russia.

• It also raises questions over future tie ups between Russia and China. Areas such as payments systems, broader financial markets, transportation and machinery have all been touted as sectors for potential cooperation between the two countries. Again while a long term issue, such ties up may concern the West since Russia and China are currently reliant on their exports in many of these areas. Both the EU and US will need to figure a clearer policy for how to deal with such changes, with the EU in particular in need of updating its policy towards its eastern neighbourhood.

Could Ukrainian shale gas break Ukraine's dependence on Russia?

Could Ukraine's shale gas turn the tables on Russia?

Ukraine is currently both dependant on Russian gas imports (60% of Ukrainian gas comes from Russia) and a major transhipment route for gas to Russia's export markets in the EU. This has historically put Ukraine in a weak position vis-a-vis its eastern neighbour. A fact underlined in the last few days when Gazprom increased the price it charged following the change of government in Kiev, forcing Ukraine to seek emergency finance from the west.

This could however change. Ukraine has two large shale gas deposits, one (the Lubin basin) in the Ukrainian speaking west and another (the Dniper-Donets basin) in the Russian speaking east. The eastern one has, according to the energy consultancy Advanced Resources International, nearly 76 trillion cubic feet (Tcf) of potentially recoverable gas, the western basin shared by Moldova and Poland another 72.5 (Tcf). For context, the same consultancy suggests there are 26 Tcf in the UK and 136.6 Tct in Poland.

Ukraine is in the middle of Russia's export pipe line to the EU

These deposits are therefore sizeable and close to existing pipelines making both production for domestic consumption and export possible. If Ukraine could attract investment to develop these fields then it could measurably improve its energy and economic independence from Russia.

However, Ukraine should not get its hopes up quite yet. Although large in themselves the deposits are small by US standards (they have 1,161 Tcf  of technically recoverable shale) and for that matter Russian (285 Tcf). It is also unlikely they could come on stream in the near future.

The eastern gas deposit falls within
Ukraine's Russian speaking regions

The larger, more obvious problem is political instability. The eastern basin falls exclusively in the Russian speaking part of the country and until the impasse with Russia is broken it is unlikely international energy companies would want to sink the investment needed into an unstable political environment. So if energy independence could help Ukraine escape from Russia's orbit and calm the political crisis, it cannot do so until it has settled its current dispute with Russia. Of course Russia knows this too and Ukraine's shale reserves therefore present another factor in this deeply complicated and difficult geopolitical standoff.