China and Russia reshape world energy dynamics

Dong Xiucheng, deputy dean of the School of Business Administration at the China University of Petroleum, speaks to Interfax about Sino-Russian energy cooperation and China’s gas price reforms.

Interfax: China and Russia are entering an age of unprecedented energy cooperation as part of a broader geopolitical partnership. How will this Beijing-Moscow energy axis shape the global energy market and change China’s relationship with its existing energy suppliers?

Dong Xiucheng: Sino-Russian energy cooperation will affect the whole structure of the global energy market. Russia is a big energy supplier whose main market is located in the west. However, the shifting geopolitical environment has forced Russia to turn east.

This pivot will help Russia expand its market and also avoid western control. Europe, on the other hand, will seek to reduce its reliance on Russia – by turning to the United States, adjusting its own energy strategy and strengthening its positions in the Middle East and Central Asia.

The cooperation will also change the energy security picture in China. China has emphasised diversification of its energy sources and routes. In the past, the majority of China’s oil and gas imports transited the South China Sea.

It is in China’s interest to increase its energy sources and routes, and as the world’s biggest energy consumer, this change will certainly affect the world’s energy make-up. Furthermore, cooperation may result in new norms for the market. The global energy market is dominated by the US dollar, but the cooperation may diminish the dollar’s role.

Other energy suppliers to China may be affected, but as the country continues its strategy of diversification and energy demand continues to grow, increasing imports from Russia do not necessarily mean a reduction from other sources.

Interfax: During the APEC conference last month, Gazprom said it was considering a potential third pipeline to China, from Vladivostok. Three pipelines would represent a significant commitment by China to Russian gas, so how strong is Chinese interest in a third pipeline?

DX: China should be very interested in a third pipeline because of its huge potential gas demand. This demand will come from China’s energy restructuring to solve the issue of climate change and pollution.

The principles of this restructuring are to reduce coal consumption, stabilise oil use and increase the use of gas. More gas consumed means less coal is burned, helping to fix the problem of smog and carbon emissions.

Interfax: Global oil prices have fallen in recent months, depressing gas prices. If prices remain as low as they are now, or fall even further, what does that mean for the negotiations between Beijing and Moscow for Russian gas along the western route?

DX: The fall in global oil prices is unlikely to affect energy cooperation between Russia and China. The negotiations won’t stop because of falling oil prices, as gas prices in Asia are all linked to oil. It would be the same result if Russia tried to sell gas to other Asian countries.

Interfax: If global oil prices remain low, this could mean a price cut for incremental gas supply in China under the government’s oil-linked price formula. What do you see happening to Chinese gas prices in a low oil price environment, and do you think the central government will stick to its commitment of market pricing for gas – even if it means a price cut?

DX: Yes, the Chinese government will continue to push forward with gas pricing reform. Theoretically, if global oil prices fall, then domestic gas prices should fall accordingly based on the price formula.

However, the prices for existing gas supply don’t follow this formula and we are talking about a large volume of gas here, so China’s gas prices would still be low as a whole. It is impossible to lower gas prices now, but if oil prices continue to fall to a certain extent, the possibility cannot be discounted.

Interfax: What are the key issues to address in the 13th Five-Year Plan (FYP) for gas development?

DX: Gas will embrace major growth in the 13th FYP period, from 2016-2020. Gas supply will be more plentiful than ever before, with domestic production and imports both rising.

Shale gas development has been elevated in importance in the 13th FYP, in light of the breakthrough made by Sinopec’s Fuling project, and the industry will grow faster than in the previous five years. Coal-to-gas will also be a hot spot of investment and development, but approached more cautiously by the government.

In terms of upstream regulation, steps will be made in the allocation of mineral rights for conventional gas. Companies besides the three NOCs will be allowed to develop conventional gas, but foreign companies will still be barred from operating independently.

The pipeline network will move towards independent operation, but will not get there within the 13th FYP period.