Note to Europe: Watch How China Negotiates Russian Oil Deal

by: Craig Pirrong

That Sergei (”The Tarantula”*) Lavrov shot down in flames Hillary Clinton’s attempt to get Russia to agree to tough sanctions on Iran. Actually, I’m not. I would have only been surprised if Lavrov and Putin had expressed a willingness to do something serious. I would like to ask, though, that anyone who did fall for Medvedev’s showing a little ankle on this to email me at Have I got some deals for you!

And if anyone is confused on this, consider that Putin has also expressed his deep, deep concern for those oh-so-fragile Iranian psyches, and is recommending that nobody do anything that might scare the poor dears:

Russian Prime Minister Vladimir Putin Wednesday warned major powers against intimidating Iran and said talk of sanctions against the Islamic Republic over its nuclear program was “premature.”

Putin, who many diplomats, analysts, and Russian citizens believe is still Russia’s paramount leader despite stepping down as president last year, was speaking after U.S. Secretary of State Hillary Clinton visited Moscow for two days of talks.

“There is no need to frighten the Iranians,” Putin told reporters in Beijing after a meeting of the Shanghai Cooperation Organization.

“We need to look for a compromise. If a compromise is not found, and the discussions end in a fiasco, then we will see.”

“And if now, before making any steps (toward holding talks) we start announcing some sanctions, then we won’t be creating favorable conditions for them (talks) to end positively. This is why it is premature to talk about this now.”

Premature, premature, premature. Manana, manana, manana. Get the picture, Hillary? Russia ain’t going to do jack to pressure the Iranians. Move on to plan B, or C, or whatever one we’re on now.

So just what did we get for the unilateral shafting of the Poles and Czechs? Just asking.

For an interesting contrast, watch Putin and Russia deal with China. Putin traveled to China to announce big energy deals with great fanfare. Everything is agreed! Uhm, except the price. Details, details.

China has shown no interest whatsoever in agreeing to the same oil-based pricing formula as Gazprom (OTCPK:OGZPY) employs in its European sales contracts.

Given the bilateral monopoly condition that would characterize any Gazprom/Russia-China deal, the same sorts of issues that I addressed in my take-or-pay post will make any Russia-China agreement very hard to negotiate and enforce. So, I wouldn’t hold my breath in expectation of such a deal any time soon.

It is very interesting to note, though, how much more difficult it is for Putin and Russia to deal with China than the Europeans. The old standby divide-and-conquer gambits that routinely work with the Euros are not an option in dealing with China. Putin doesn’t look quite so smart or powerful in dealing with a single, hardheaded negotiating partner as he does in rolling divided, squabbling, and politically vulnerable Europeans. If the Euros were smart they would watch, learn, and imitate. Note that this is a conditional statement, not a prediction. I doubt that they will.

Roman Kupchinsky at Jamestown notes that the Chinese are also quite concerned about the Russian ability to deliver on all the blank gas checks they’ve written–a point I’ve made repeatedly on SWP:

[T]he main concern analysts have is Russia’s ability to supply 68 bcm of gas per year to China while meeting long-term commitments to European customers as well as rapidly increasing Russian domestic demand for gas.

Earlier this year, Gazprom announced that gas from the Sakhalin-1 project will not be sold to China, but diverted instead to the gas hungry Russian Far East region of Vladivostok. Gazprom is holding talks with Exxon (NYSE:XOM) about buying all of its gas output from Sakhalin and industry sources say the company is offering prices equal to Russia’s domestic gas prices – which are far below world prices. Exxon said it is studying all options to sell gas from Sakhalin-1.

In addition to making promises to supply China, Gazprom has also stated that it wants to capture 10 percent of the U.S. gas market within the next 5 years by selling some 66 bcm of gas in the form of LNG [liquid natural gas]. The plan envisions that Sakhalin-2 will supply the bulk of this LNG.

The bottom line is whether Russia is capable of building such costly pipelines as Nord Stream, South Stream and a second string of Blue Stream; while at the same developing the Yamal peninsula into a major gas producing center and finishing the Shtokman project? These projects, and others too numerous to mention, are projected to cost hundreds of billions of dollars which Russia does not have and which Western companies might not want to spend given the shaky business reputation of Gazprom and its management.

Exactly. The Chinese presumably extracted something from Putin in exchange for letting him put on this Potemkin/Putinkin-goes-gas display. But China will almost certainly not rely in a serious way on Russian promises of future energy supplies, because it understands that Russia’s ability to perform on its commitments is so doubtful. If it does enter into agreements with Russia, it will likely impose contractual terms that will shift the major risk of non-performance due to the inability to obtain the necessary supplies to the Europeans. Yet more reason for the Euros to get their act together.