Realities Temper China-Russia Oil, Gas Cooperation, Expert Says

Changing markets and unanticipated transportation difficulties are making oil and gas cooperation between China and Russia harder to achieve, an expert told an Oct. 18 seminar at Johns Hopkins University's School for Advanced International Studies.

The Chinese remain interested in Russian crude, despite overtures to Caspian basin producers in 2000, but are pursuing gas from other sources, according to Keun-Wook Paik, a research fellow at Oxford University's Chatham House Energy Research Center and author of a forthcoming book, "Sino-Russian Oil & Gas Cooperation: The Reality & the Implications."

He said projected northeastern Russian production declines made the Chinese revamp several refineries to receive crude from other suppliers. China also has begun to take a phased pipeline development approach, Paik said. "They can build 1,000 km/year without outside assistance, but it has to be justified," he noted, adding that 40% of Kazakhstan's produced oil now goes to China after 10 years.

Gas is a different story because of prices, Paik continued. "Unlike oil, it's driven by the market itself," he said. "China has tried to demonstrate that it wants gas to benefit the consumer as well as the supplier. Russia still considers China an important potential gas market. But from China's viewpoint, Russia is not its main gas source."

The prospects for Russia to sell significant volumes of gas to China also have been restricted by its not having significant pipelines across its Asian territory, by China's recent significant Ordos basin gas discovery, by potential significant gas development off the eastern African coast, and by the North American shale gas revolution's potential downward pressure on global LNG prices, Paik said.

Consequently, China is in a position to demand opportunities to take financial positions in Russian exploration and production, he suggested. "But it would have to consider opening its downstream more than it has to Russian oil and gas," Paik said.

If the US government authorizes LNG exports, he said that East Asian markets could feel a significant impact. "Not only North American, but East African offshore gas could give East Asia some breathing room so it would not have to buy LNG at a premium," Paik said. "Without it, China will continue to rely heavily on coal, which is beginning to look increasingly unacceptable environmentally."