Russia and China were already negotiating a natural gas pipeline deal in the mid-1990s. In the Eastern Plan, a line from the Sakhalin region in eastern Russia would deliver Russian natural gas into northeastern China. By 2006, however, talks had shifted to the Western Plan, which would pipe gas from western Siberia across the border into Xinjiang. A memorandum was signed in 2009, and this May, energy officials signed a protocol that almost sealed the deal.

But Gazprom and PetroChina could not reach an agreement on prices. A video conference organized by the Russian International News Agency on June 20 highlighted both sides' arguments. Unrest in the Middle East has increased European dependence on Russian natural gas, while the Fukushima nuclear disaster means that Japan will have to import 1.3 million tons of liquefied natural gas per year to compensate for the lost energy production.

These changes in supply and demand have led to an increase in natural gas prices. If unrest in the Middle East continues, prices in Europe may increase by 60 percent, while Asian prices may rise by 40 percent, says Xia Yishan, director of the Center for Research on Energy Strategy at the China Institute of International Studies. Russia will not miss an opportunity to stabilize and deepen the dependence of Europe and Asian on its natural gas.

"By 2030, Europe's demand for natural gas will probably increase from the present 300 billion cubic meters to 700 billion, and the portion of that supplied by Russia will increase by 8 percent, to account for 42 percent of the natural gas imported by Europe," says Valery Yazev, deputy chairman of Russia's State Duma and head of the Russian Natural Gas Association.

Russia is equally confident about insisting on a high price for its natural gas. Europe pays US$350 per cubic kilometer, but China wants to pay closer to US$235 per cubic kilometer. Yazev said there was "no basis" for China's offer.

But of course there is a basis. Natural gas, unlike petroleum prices, has no unified international price, and regional prices are not directly related, pointed out Pang Changwei, an energy specialist at China University of Petroleum's Institute for Research on Energy Strategy. Transportation also are large factor in determining costs – the Altai pipeline between Russia and China will be 2,500 kilometers shorter than the pipeline between Russia and Europe.

China also pays US$168 per cubic kilometer for natural gas from Central Asia and the equivalent of US$180 per cubic kilometer for liquefied natural gas from Australia. There may be no reason for Russia to sell to China for less than it sells to Europe, but there is also no reason for China to pay more for Russian natural gas than for the resource from other countries, Pang said.

Despite all this inflexible wrangling, it is clear that China and Russia both believe deeply that they will become partners in natural gas. Thus, both have also proposed many constructive suggestions. Pang repeatedly called for more cooperation between the two country's energy planning departments.

"At present, coal accounts for 70 percent of China's energy consumption, and natural gas accounts for 4 percent. How much will that increase in five to 10 years? What percentage of that will be imported from Russia or Central Asia?" Pang said. "These questions should be discussed between the two countries' energy planning departments to establish a mutually beneficial strategic partnership in these matters."

Pang also recommended that China and Russia determine a flexible pricing formula and work together to foster the Chinese market for natural gas. "From the start, China has employed a strategy of diversity regarding the importation of natural gas," Pang said. "If Russia fails to establish a foothold in China's market within the next decade, it may lose this opportunity for good."

Yazev proposed that Russia increase its market competitiveness by utilizing more of its energy resources. "Russia has one of the lowest extraction rates for natural gas in the world," he said. He also said that a Sino-Russian agreement could boost Russia's GDP by 2 percent.

(This article was written in Chinese and translated by Matt H.)

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