With a new 30-year contract worth US$400 Billion, Russian energy company Gazprom landed one of the biggest gas deals in history with China. However, according to Dr. Frank Umbach of the Centre of European Security Strategies GmbH in a report written for intelligence consultancy Geopolitical Information Service, Gazprom’s compromise on price raises doubts about the profitability of this bilateral deal.

In the report, titled “The strategic implications of Russia’s record-breaking gas contract with China”, Umbach said, “The deal will see Gazprom supplying 38 billion cubic meters per year, starting in 2019. However, Moscow is said to have offered Beijing several changes to its energy tax, a stake in Gazprom’s Vladivostok LNG-terminal and a 19% stake in Russia’s oil company Rosneft.

“The tax break could cost Russia’ state budget an estimated US$30 billion in revenue over the contract period,” he said.

Gazprom had to compromise on price with China to protect its expected future market share in Asia from foreign and its own domestic gas competitors, he added. “Pressure on Gazprom increased with the emergence of its more efficient and ambitious Russian rivals, Rosneft and Novatek, which had signed gas contracts with China, undermining Gazprom’s gas export monopoly,” Umbach said.

“Many of the contract details—including the real price China is paying for Russian gas—remain vague or are unknown. But China has agreed to pre-pay US$25 billion before gas supplies begin and will invest another US$20 billion directly. Gazprom could not start pipeline construction without this loan,” he said.

“Some Russian experts have warned that altogether, Russia would need a gas price of US$440 to US$570 per 1,000 cubic meters to make the entire bilateral deal really profitable,” Umbach said.

The price compromise, and the profitability of the deal, “will depend on efficient development of the gas fields and pipeline at a time when there is an oversupply in the Russian gas market and Gazprom is losing market share to its domestic competitors Rosneft and Novatek,” he said.

“The gas deal also confirms that both countries are not equal geopolitical partners. Russia will be China’s junior partner contrary to its self-defined great power status and geopolitical ambitions in Eurasia and the world.”