Tensions with the West since 2014 have contributed to Russia’s attempt to “pivot East” and coordinate with China on providing energy supplies. China is already Russian oil’s biggest customer, and in 2019 importing Siberian gas thanks to the massive “Power of Siberia” pipeline. But how far will Russia-China cooperation work? What are the risks for Russia? Will it become an “energy appendage” of Beijing? Ernesto Gallo and Bruno Sergi examine the changing dynamics of the relationship between Russia and China.
The energy market of the 1990s made Russian energy very attractive to European countries. Indeed, President Vladimir Putin—in his first term as President—was very interested in opening the Russian energy market to Western energy companies and signing an energy partnership with the United States. However, since 2014, the economic partnership between Russia and China in Siberia and the Russian Far East has grown in scope and depth. In 2016, China had already become the largest recipient of Russia’s crude oil exports, receiving 953,000 barrels per day, i.e., 18% of Russia’s total oil exports. At the same time, Russia surpassed Saudi Arabia as the leading supplier of crude oil to China. Will the same happen with natural gas?
On the EU side, there is a significant danger to energy security, due to the insufficient diversification of supply routes. Fifty-three percent of Russian gas delivered to Europe is transported via pipelines through Ukraine. Any disruption along this route is a threat to supply.
On the Russian side, Gazprom’s fields are in decline, with aging infrastructure and stagnant production. Russia is attempting to secure Western investment, technological capability, and technical expertise, so Gazprom can replace and modernize their infrastructure. Yet only Germany seems to enjoy exclusive and close relationships with the Russian energy industry. The new EU energy policy, by contrast, is to diversify the geography of oil and gas imports. Simultaneously, the US is set to hit the world market with shale oil and gas starting in 2018, which is an enormous challenge for Russia.
Moscow looks bound to “go East” and turn to the Chinese market – but what are the risks?
Russia’s Pivot to China
Russia seeks to improve its economy, and to diversify its market so that it does not rely on finite natural resources. While a few high-profile projects between the countries have been put on hold, Russia and China are working on a long-term strategy. The West is skeptical of this “pivot,” and the US has been increasing its support to its allies in the East by starting to ship LNG to East Asia, after lifting a four-decade ban on oil and gas exports in 2015.
However, Russia-China energy cooperation has already taken important steps: the integration of Russia with Asia-Pacific through accelerated development of Siberia and the Far East (Putin’s “pivot to Asia”); the “Energy Dialogues,”established by a 2008 agreement between Medvedev and Hu Jintao; and various Commissions established by Putin since then. Russian oil is supplied to China through the Skovorodino-Daqing pipeline (since 2011) and on May 21, 2014, Gazprom and PetroChina signed a 30-year mega contract to supply China with Russian gas (worth $400 billion) via the Eastern route of the “Power of Siberia” pipeline.
In 2015, Gazprom and CNPC signed a Memorandum of Understanding on a project envisioning pipeline supplies of natural gas to China from the Far East in Russia. In September 2016, Gazprom and CNPC also signed an EPC contract—i.e., engineering, procurement, and construction contract—for the construction of an underwater crossing for the cross-border section of the “Power of Siberia” pipeline under the Amur River. In 2017, the Russian and Chinese sides continued talks on studying the prospects for cooperation concerning building generating capacities in China—as well as underground gas storage units—to support an increase in supplies of Russian “blue fuel.”
At the same time, China and the Russian-led Eurasian Economic Union (EEU) have rapidly reached an agreement to coordinate the EEU and the China-sponsored mammoth plan “Belt and Road Initiative” (BRI). After all, China needs Eurasian energy, while Russia and other former USSR countries need capital and newer infrastructures. A cooperation agreement was eventually signed in Astana in May 2018, just four years since the coming into existence of the EEU.
A vital aspect of this cooperation is trade in gas. China is the world’s top energy consumer. While coal is still its most used fuel (60.4% of overall energy consumption), gas consumption is growing quickly (+15% in 2017). China badly needs cleaner energy and better environmental conditions. This has resulted in “green” aims, that have been formulated in the latest Five-Year Plan and are a signature policy of President Xi. The International Energy Agency predicts that China’s natural gas production will reach 255 bcm by 2030, that is, 61% of total projected demand will have to be met by imports. The country’s import dependency climbed from zero in 2005 to 39% in 2017.
The Central Asia-China gas pipeline, completed in 2009, changed the rules of the game in the region. Russia was the primary energy partner of Turkmenistan until 2009, when a suspected explosion along the pipeline connecting the two countries broke off the gas flow and led to the breakdown of the relations between Moscow and Ashgabat. This resulted in the strengthening of cooperation between Turkmenistan and Iran, which had already been linked by a pipeline built in 1997. While in 2009, Iran became the first importer of Turkmen gas, China has rapidly taken the lead. Today, Turkmenistan is China’s top gas supplier; it exports 94.3% of its worldwide supply to China.
While China is estimated to have the world’s largest shale gas reserves, some studies point to high decline rates of some shale gas wells as an indication that shale gas production may ultimately be much lower than is projected. China possesses up to 361 bcm of shale gas deposits, which would be the world’s largest. However, while only 218 bcm are technologically extractable according to the Chinese National Energy Administration. From an economic standpoint, availability is even lower due to geologic complexities, especially in areas where deposits are located more than 3,500 meters below ground. As of 2017, shale gas production represents only 6% of total domestic Chinese production.
Russia, for its part, is a world-leading gas exporter but has so far mainly concentrated on the European market. The massive “Power of Siberia” gas pipeline, likely operational in late 2018, will be a game-changer. Russia will start gas-pumping into China where so far it has exported only small amounts of LNG (0.6 bcm in 2017). Moreover, the whole Northeast Asian region (which includes other gas-thirsty economies such as Japan and South Korea) looks to Moscow as a promising (and generally less expensive) supplier. Russia’s energy “pivot to Asia” could also be a way for Moscow to strengthen control over the remote and thinly populated Russian Far East.
Risks and challenges
Pivoting to Asia (especially China) can also be a source of major risks. Commentators have remarked that the estimated price China will have to pay for Russian gas supplies is lower than what Russia had expected, which reflects China’s stronger bargaining position. One could perhaps respond that, after all, Russia saw the deal mainly in political terms (securing a position in the Chinese market as a show of strength vis-à-vis the West and the EU). Where China’s position was at its strongest, however, was in the choice of route. Moscow had to give up on the Altai-Xinjiang route, which would have been cheaper and would have permitted Russia to switch between supplying Europe or Asia. Talks on building the Altai route have since resumed, but there is little clarity on its future. Furthermore, China has many options, and does not depend on the “Power of Siberia” supplies. Leaving aside imports from Central and Southeast Asia or domestic shale gas, China can also import from the LNG plant in the Yamal peninsula, whose development has just started, and where CNPC is a significant shareholder, together with an independent Russian producer, Novatek, Total, and the Silk Road Fund.
Even if Russia has strengthened its position in the EU gas market since 2016, challenges loom ahead. The USA intends to sell LNG abroad and might become a competitor in Europe, too. Italy’s ENI, after discovering the giant gas field Zohr off the Egyptian coast (in 2015), has recently found a new Egyptian field, Noor, which is rumored to be three times bigger. Will Italy, one of Russia’s leading EU customers, shift its energy focus to the Eastern Mediterranean? The European Commission’s blueprint mentions Azerbaijan and Turkmenistan, as well as the Mashreq countries (East of Egypt: Jordan, Lebanon, Syria, and Iraq) and the Maghreb countries (West of Egypt: Algeria, Morocco, and Tunisia). According to Moscow, only Russia, Iran, and Qatar can be suppliers of pipeline gas in the long term. Egypt could become a significant gas exporter to the EU. Also, Israel and Cyprus could turn into potential energy exporters, and some expect that Israel has the capaсity to supply Europe with up to 30 billion cubic meters annually to cover only part of the 500 billion cubic meters of European imports. It is also relevant that the Southern Gas Corridor (six countries from the Caspian Sea, i.e., SCP, South Caucasus Pipeline + Tanap, Trans Anatolian Pipeline + TAP, Trans Adriatic Pipeline) that would carry just one-third or even less than the volume promised by Nabucco but would also cost a lot less. The TANAP will transport Shah Deniz gas across Turkey, from the Turkish border with Georgia all the way through the Greek border. The TAP will take natural gas from the giant Shah Deniz II field in Azerbaijan to Europe. The approximately 870 km long pipeline will connect with the Trans Anatolian Pipeline (TANAP) at the Turkish-Greek border (Kipoi), cross Greece and Albania and the Adriatic Sea, before coming ashore in Southern Italy. With first gas sales to Georgia and Turkey targeted for late 2018, first deliveries to Europe will follow approximately in 2020.
This project can help diversify European gas imports, even if it would supply nothing more than 2.4% of the continent’s gas consumption. New gas interconnectors that stem from TAP could also be built. For example, an interconnector between TAP and Druzhba from Fier, Albania up to Croatia should be built. This would allow the Croatians to decrease the oil flow from Druzhba, lessening Russian influence in their politics. Moreover, Poland and the Baltics signed a deal on May 28 by which they would connect their power grid to the EU by 2025, and the Baltic states would unilaterally decouple from Russia.
To summarize, Russia is facing energy challenges on several fronts. The US intends to become an “energy superpower,” and the EU has a range of opportunities to diversify its supplies. The most significant risk for Russia is that China will increasingly dictate gas prices, pipeline routes, and gas supply quantities to China. The only other EEU country with significant gas reserves, Kazakhstan, has already strongly increased its exports to China. While diversification is crucial, Eurasian countries must avoid becoming over-dependent on China’s fast-growing thrust for newer energy sources. Otherwise, in the long term a scenario might materialize by which Russia and Eurasian states become resource suppliers (or “energy appendages”) to a substantial manufacturing power, that is, China: a risk nobody, particularly in Moscow, can and wants to afford.
Bruno S. Sergi teaches on emerging markets and the political economy of Russia and China at Harvard University; he is an Associate of the Davis Center for Russian and Eurasian Studies; and he is Scientific Director of the Lab for Entrepreneurship and Development at Harvard. He also teaches international economics at the University of Messina, is the Series Editor of Cambridge Elements in the Economics of Emerging Markets, Co-Series Editor of the Emerald Publishing book series Harvard Lab for Entrepreneurship and Development, an Associate Editor of The American Economist, and Co-Founder and Scientific Director of the International Center for Emerging Markets Research at RUDN University in Moscow.
Dr Ernesto Gallo received his PhD from the University of Turin. He has lectured in several British universities, among which the Birkbeck College and the University of Birmingham, and is currently based at Regent’s University. Dr. Gallo has published in English and Italian on issues of international relations and political theory, globalisation, empire, and Eurasian politics.