Several days before the St. Petersburg International Economic Forum, the Chinese Foreign Ministry officially confirmed the participation of President Xi Jinping, who was in Russia on a state visit, at the forum and its plenary meeting. In light of the ever more US-Chinese differences, this could be seen as an invitation to closer Russian-Chinese economic cooperation, primarily in the gas sector. However, it turned out to be more of a symbolic gesture. The only new document that has been signed in this sphere is the Heads of Agreement between Novatek, Gazprombank and Sinopec on establishing a joint venture to market LNG and natural gas to end-customers in the People’s Republic of China.
On the one hand, the goal of this agreement is to sell gas to end consumers in a country with the world’s largest natural gas demand. Over a period of the past two years the consumption of gas in China has grown by over 15 percent annually, largely due to new import deals. On the other hand, China’s regulated gas market often generates losses for importers, while its liberalization terms are still under discussion. This is why Russian and Chinese companies have only signed “heads of agreement,” which is usually seen in the business world as a cover for the absence of a firm agreement.
Besides, the choice of the strategic partner for marketing gas in China is indicative. Novatek has several Chinese partners in Arctic LNG projects, including CNPC and Silk Road Fund in the Yamal LNG project. China National Oil and Gas Exploration and Development Company (CNODC), a subsidiary of CNPC, and CNOOC expect to take part in the planned Arctic 2 LNG project, on which an investment decision is yet to be taken. Both companies have signed a binding agreement for the acquisition of the 10 percent participation stake in the project. However, Novatek now plans on entering the Chinese market via Sinopec. This means that Novatek will share LNG production profits in Russia with CNPC and CNOOC but will compete with them for end consumers in China in partnership with Sinopec.
Sinopec is an old partner. Back in 2015, it bought a 10 percent stake in Sibur, Russia’s top petrochemical company that is controlled by the largest Novatek shareholders, Gennady Timchenko and Leonid Mikhelson. It is notable that Sibur was a party to the other two oil and gas agreements signed during President Xi Jinping’ visit to Russia. One is a Term Sheet for a potential joint venture (JV) that could be based at Amur Gas Chemical Complex (Amur GCC) where Sinopec would hold a 40 percent stake. The other is an agreement on enhancing cooperation with the Silk Road Fund, which acquired a 10 percent stake in Sibur in 2017.
The agreement with Sinopec is subject to Sibur’s final investment decision, but the petrochemical company is taking time to coordinate tax privileges with the government. Meanwhile, the construction of Gazprom’s Amur Gas Processing Plant (Amur GPP), which will supply raw materials to the AGCC, is proceeding apace. The Amur GPP is designed to extract valuable ethane fractions from gas that will be delivered to China via the Power of Siberia pipeline. Until the Amur GCC is completed, Russia will have to export unprocessed gas with a lower added value, most likely to China.
The agreement on enhancing cooperation with the Silk Road Fund may mean that the Chinese company will join the Amur GCC project after the plant has been built.
