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The strategic implications of the second Russia–China gas deal on the European gas market

Anton Orlov

At the end of 2014, Russia and China signed a framework for their second natural gas agreement. According to this agreement, Russia will supply 30 billion cubic metres of gas to China over 30 years via the future Altai pipeline, which will connect Asian and European gas markets. This paper analyses the long-term impacts of this second agreement on the European gas market, based on a modified Hotelling model. We found that gas exports to China could result in re-optimisation of the Russian profit maximisation strategy in Europe via a stock effect, which occurs when the marginal production cost is affected by the remaining stock. The results show that the export supply to Europe could decrease by 11.8 bcm annually under a stock elasticity equalling unity. Furthermore, gas exports to China will reduce the long-term potential of Russia to supply gas to Europe. While scarcity of gas reserves may not be an issue for Russia in the medium term, it could become more important in the future. Our results show that Russia could take a stronger bargaining position after 2051. Overall, total gas consumption in Europe could decrease by 8.5 bcm annually.

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