Russia And China About To Sign "Holy Grail" Natural Gas Supply Deal

Several weeks ago we reported that in response to ongoing alienation of Russia by the west Putin was aggressively setting the stage for Russia's eastward expansion, set to culminate with a "holy grail" gas deal with China. We said that "while Europe is furiously scrambling to find alternative sources of energy should Gazprom pull the plug on natgas exports to Germany and Europe (the imminent surge in Ukraine gas prices by 40% is probably the best indication of what the outcome would be), Russia is preparing the announcement of the "Holy Grail" energy deal with none other than China, a move which would send geopolitical shockwaves around the world and bind the two nations in a commodity-backed axis."

Reuters added, reflecting on the recent trip of Rosneft executive chairman to Asia, that "the underlying message from the head of Russia's biggest oil company, Rosneft, was clear: If Europe and the United States isolate Russia, Moscow will look East for new business, energy deals, military contracts and political alliances.  The Holy Grail for Moscow is a natural gas supply deal with China that is apparently now close after years of negotiations. If it can be signed when Putin visits China in May, he will be able to hold it up to show that global power has shifted eastwards and he does not need the West."

It's time for an update. According to Itar-Tass, "Russia's Gazprom and China are poised to conclude a gas supply contract in coming weeks, the first in a series of energy projects planned between the two countries. "We’re working now to sign a gas contract in May," said Deputy Prime Minister Arkady Dvorkovich. "Consultations are continuing and Gazprom's leaders are holding talks with Chinese partners on the contract terms. We hope to conclude the contract in May and believe it should come into effect by the year end."

The key sticking point remains the price: "Base price is the only problem to be solved,” Dvorkovich said on Wednesday at a session of a Russia-China intergovernmental commission on energy co-operation, co-chaired by Chinese Vice-Premier Zhang Gaoli." However, even if Russia concedes the topline to China, it will surely "more than make up for it in volume" to borrow a line from Amazon, and furthermore the geopolitical implications from such a deal, not to mention the increase in national leverage vis-a-vis its dealings with Europe and the West, will more than make up for any immediately revenue shortfalls.

But wait - there's more in the rapidly shifting geopolitical axis which increasingly positions Russias as a key commodity source for China:

In other plans, Russian company Novatek’s Yamal region LNG (liquefied natural gas) project was near ready for signing, Drovkovich said. Russia's Rosneft had several interesting plans "seeking to increase maritime supplies by several million tonnes per year,” he said.

“Russia and China have agreed to jointly develop gas fields in (Russia's far eastern) Sakhalin and East Siberia,” Dvorkovich said. “We have discussed co-operation in the coal sphere, agreeing to develop deposits, supply equipment and build electric power plants as well as providing China with additional electricity supplies”.

“We’re finding mutually advantageous decisions on certain projects that will allow us to implement them in the shortest period of time,” Dvorkovich added. Conditions were right to speed the Tianjin oil refinery project and to build a petrochemical facility, he said.

This is happening as Ukraine announced overnight that it won't import Russian gas in April due to the surge in price that Gazprom is demanding from the US proxy state, and following ongoing Gazprom invoiving of how much Ukraine owes it which at last count was well over $2 billion - an amount which we be funded from the still to be finalized western aid to be provided for Ukraine.

Of course, at this pace, Ukraine and even Europe, will become far less meaningful markets to Russia as Putin prepares to announce what indeed would be the holy grail of gas supply deals, one that reduces Russia's reliance on European energy imports and substantially raises Russia's relevance to China as the two countries increasingly become the bestest of buddies.

Which certainly is also why, as Bloomberg reported this morning, "in the talks between China and U.S.’s Hagel overnight, the Chinese are taking a different tack. Rather than argue the merits of the disputed islands/history, they seem instead to say that it’s none of the U.S. business to get mixed up in something in another part of the world and between two sovereign nations. 

Bloomberg's conclusion: "Not only is this probably music to Putin’s ears, it also serves to ratchet up the tensions."

Just wait to see how "ratcheted up" tensions will be once Russia and China are finally locked into a bearhug of mutual codependence.