Energy alliance between Russia and China

A decade of negotiations resulted in a new accord between China National Petroleum Corporation (CNPC) and Russia's Gazprom during President Putin's visit to Beijing in May 2014. It paves the way for development of the mammoth Chayanda natural gas field located in Russia's eastern flank which, when completed in 2018, will carry an estimated 38 billion cubic meters (bcm) of natural gas to China. This marks a significant shift in Russia's energy export policy which until now had been geared towards supplying Europe with natural gas. The agreement is very important for Russia as it binds China to purchase a minimum of $400 billion worth of gas over a period of 30 years.

This deal is more than simply cents and dollars for one of Russia's principal exports. As pointed out by a report in Foreign Policy Research Institute: “Having long underinvested in exploration to replace aging and depleting fields, Russia's energy companies needed money to develop new oil and natural gas reserves in the Russian Far East.” The deal could not have come at a better time. With the Ukrainian crisis now in full swing and talk of tougher economic backlash in the works from the West and a general rethinking by Europe on its reliance on Russian gas, the first major step on moving the supply chain of natural gas from Europe to Asia has been taken.

Market diversification, i.e. a move away from overreliance on the European market has been a headache for Russian policymakers for some time now. The deal inked in May is the first of many steps we are likely to see that will eventually carry Russian gas to other markets in Asia. And it is not only gas that is being talked about here. With the Daqing pipeline becoming operational in 2012, Russian oil that had previously been transported to China on rail links is now being transported much more efficiently and safely. Cracking the Chinese market was imperative for Russia as it is not only large global energy player. Both Australia and the United States are emerging as serious contenders in the international energy market. Multinational oil companies are set to reap the benefits from a string of natural gas exploration projects off the Australian coast. Media reports estimate that “over 80bcm of natural gas capacity is slated to come online” from Australian drilling, which will be converted into liquefied natural gas (LNG). While the US has taken the lead in “fracking” technology that will probably bring the same volumes of natural gas to the market.

China too has benefitted from Russian overtures in the energy sector. For years now, China has been devouring natural energy sources from different continents and has invested billions of dollars in exploration activities and infrastructure investments abroad. The problem lies in using sea lanes to transport the precious cargo, routes that are beyond its control. The rise in tensions, particularly with the US and its allies over the South China Sea, is just one example. Looking beyond the obvious geopolitical implications, China has always been concerned with ensuring a secure line through which it can bring in energy supplies uninterrupted. Energy security for its economy has, in many ways, taken precedence over other considerations. There is reason for this. In the '90s, the country was no longer self-sufficient in energy supplies from domestic sources. Hence, the hunt for raw materials to fire up its factories stretched as far away as Latin America.

In many ways the 2008 global financial meltdown was a boon for China's energy sector. With the Western economies going into nosedive, Chinese companies bought stakes in many western oil and gas companies. As pointed out in an article in Caixin Online on January 27, 2014: “State-controlled China Petrochemical acquired a 40 percent interest in Repsol's Brazilian oil assets for $7.1billion in 2010, PetroChina (a unit of CNPC) agreed to buy a 20 percent stake of |Royal Dutch Shell's Groundbirch natural gas development in Canada in 2011. That was followed by Sinopec's $2.5billion deal to acquire an interest in Devon Energy's shale-gas fields in the United States and PetroChina's $1.6 billion buyout of BHP Billiton's holding in Woodside Petroleum.”

It is interesting to observe the Russian bear and the Chinese panda at play here, given their animosity and cold relations as late as the 1960s. Though the world has moved on beyond the Cold War and neither country is Communist vying for control of the world Marxist order, old mistrusts die hard. It probably explains why Russia turned down a Chinese offer to build a pipeline from Siberia's oil and natural gas fields directly into China. The current arrangement is a workable model. China is too big a client for Russia to turn off the tap as it did with Ukraine in 2008, at least for the foreseeable future.

It meets Chinese needs and provides a window for Russian energy to flow elsewhere into Asia in the future.