June 25, 2014, by Editor
Marriage of convenience: China and Russia’s gas deal
Written by Karolina Wysoczanska.
Last month’s China-Russia gas deal attracted considerable attention not only because of its scale but because of its global significance. Indeed, it is probably a once-in-lifetime opportunity to witness a mega-deal like this, as only China and the United States have the demand and financial muscle to make this kind of purchase happen.
On the surface, the agreement might appear to serve as a foundation for a stronger Russo-Chinese strategic relationship. Joint naval exercises, the recent annexation of Crimea and China’s bold actions against Vietnam and Japan give the clear impression of an emerging bloc behaving contrary to western values and interests. After more than a decade of negotiations and false starts, both Chinese and Russian interest converged. The deal gained a symbolic value implying that the two countries are prepared to work together and that Russia is looking towards the East.
Some say the Ukrainian crisis coupled with European desire to reduce dependency on Russian gas has forced President Putin to finalize the transaction. Others point at Beijing and say that it became a winner of Crimea crisis and is now deliberately standing next to Moscow in a joint demonstration of power. The fact is that this energy cooperation is not a surprise. Russia’s pivot to Asia was unavoidable and contrary to mass media portrayals it is not a sudden shift. Asia, as the new centre of growth and demand is the best market Russia has for its natural gas reserves. In 2009, Russia’s state-owned oil company Rosneft signed a $25 billion contract with China, and last year it agreed to provide China with oil supplies for 25 years- in a deal valued at $270 billion. The geographic reality seems to confirm the idea that, western Siberia gas supplies make economic sense only if they travel west and eastern Siberia gas supplies must go east.
The deal enhances the energy cooperation between the two countries but it is more indicative of converging interests than strategic partnership. Beijing is not inclined to sacrifice important relations with the West for the sake of President Putin’s agenda. From China’s perspective this relationship is largely business oriented, and not unlike investments in other parts of the world where Chinese companies provide infrastructure and financial assistance in exchange for oil and gas. Russian gas supplies serve China’s interest in a number of ways. They can help Beijing to increase the use of gas – currently the fuel comprises only 4% of the country’s total energy consumption- and reduce dependence on oil and liquefied natural gas (LNG) shipped through the Malacca Strait and across the South and East China seas. Most importantly, Russian gas is cheaper for China than LNG imported from Qatar or Australia. The Russian price will likely also benefit China in future negotiations with other suppliers. On the other hand, the lower and more competitive price of Russian gas will have an impact on China’s domestic production. It is widely believed in Beijing that once contract with Russia is signed, just like now, gas development in China will slow down and it might be a few years until China has a major breakthrough in shale gas development.
There are still many complaints in China’s energy sector that the deal was too expensive and Beijing could have waited for an even better moment. China now has many more natural gas suppliers than it did when talks on the agreement began with Russia a decade ago. It has built a pipeline system connecting the western part of the country with gas suppliers in Turkmenistan via Uzbekistan and Kazakhstan. In March 2014 China agreed to build a fourth pipeline running through Tajikistan and Kyrgyzstan. Last year it also started importing gas from Myanmar. Moreover, gas from Russia is not expected to flow for at least four years and even then, it will only provide about 10 percent of China’s gas needs – significantly less than the 68 bcm Turkmenistan promised to provide over the next 30 years last year.
Although the deal has been signed many important details remain unclear including the exact route of the proposed pipeline. Currently there is one complete oil pipeline that runs from eastern Siberia to Daqing, in China’s Heilongjiang province. It began operation in 2011 and was under discussion since the mid-1990s. The gas pipeline has an equally long and even more complicated history. The first proposal to export natural gas to China was for a 4000 km pipeline from Kovykta gas field in eastern Siberia. Due to problems around TNK-BP ownership of Kovykta field and decreasing demand from Europe, Russia changed its strategy and started to prioritise gas exports from western Siberia gas fields through the proposed Altai pipeline to western China. The problem is that China would have to share gas from western Siberia with Europe- which would give Putin leverage over both buyers. The other important point is that China does not need gas from western Siberia. Turkmenistan supplies are already linked to the West-East pipeline running across the country.
China’s priority is to deliver gas to its north-east provinces, where the capacity is still low, from eastern Siberia fields. In 2012, Gazprom announced that it would supply gas to north-east China through The Power of Siberia pipeline (Yakutsk – Khabarovsk – Vladivostok) from Chayanda gas field in east Siberia, and this is currently the favoured scenario. Russia would build its own pipeline up to the Sino-Russian border and a Chinese company would build China’s own section. Unlike the Central Asia pipeline, where joint ventures between all parties involved were established to manage the project, Russia will not allow China to participate in pipeline development. This means that China would effectively have no control in the value chain, and cannot be fully assured over the stability of supplies from Russia. This is a notable risk considering that Russia has a history of using gas supplies for political leverage.
The Sino-Russian relationship is built on fragile foundations, and despite attempts to project a confidence in the bilateral relationship there appear to be few prospects for real improvements. At the moment China-Russia cooperation is convenient and serves each other’s short-term interests. In the long term, they might find it more difficult and costly to find common ground.
Karolina Wysoczanska is a PhD student in the School of Contemporary Chinese Studies, University of Nottingham.