Gazprom Paves Way to New China Gas Deal as Sanctions Hit Russia

Feb 28, 2022

(Bloomberg) Gazprom PJSC took a new step toward potentially its biggest-ever natural gas supply deal with China as nations around the world sever economic and political ties with Russia over the country’s invasion of Ukraine.The Russian gas giant signed a contract to design the Soyuz Vostok pipeline across Mongolia toward China, Gazprom said in a statement. If Russia reaches a new supply agreement with China, Soyuz Vostok will carry as much as 50 billion cubic meters of natural gas per year to the Asian nation.

A new supply deal with China would also enable Gazprom to build an interconnector between its west- and eastbound pipeline systems, effectively allowing Russia to redirect gas toward China from fields that now only feed Europe. That could ease Gazprom’s reliance on the European continent, currently the single-largest buyer of Russian gas.

The pipeline-design contract comes as the European Union and the U.S., joined by countries such as the U.K., Canada and Japan, put unprecedented pressure on Russia after President Vladimir Putin ordered the invasion of neighboring Ukraine. Sweeping sanctions are limiting Russia’s ability to import key technology, tap foreign debt markets and even to access much of the $640 billion the country built up as a buffer to protect the economy.

While Russian energy exports remain unaffected at this stage of the war, Europe has been exploring options to wean itself off Gazprom’s deliveries.

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Gazprom has been in talks to deliver gas to China via Mongolia for several years.

“Today, the design contract has been signed, this means that the project has moved to the stage of practical implementation,” Gazprom Chief Executive Officer Alexey Miller said of the Soyuz Vostok link. The statement didn’t give any details of progress on supply talks with China.

In 2014, Gazprom signed a 30-year, $400-billion deal to directly supply as much as 38 billion cubic meters of gas per year to China via the Power of Siberia gas link, where deliveries started in late 2019. In recent months, when Gazprom’s flows to Europe have been limited, shipments to China were regularly above daily contract volumes.

At the start of February, Russia reached a smaller gas deal with China for 25-year direct supplies of as much as 10 billion cubic meters per year from fields in the Far East.