Russia continues construction of natural gas pipeline

The $400 billion deal between state energy giants China National Petroleum Corporation (CNPC) and Gazprom was apparently a boon for the People’s Republic of China, the Russian Federation and their respective development plans in East Asia. What is less apparent is which of these two countries will benefit most from the deal in the short and long terms.

The contract confirming the Power of Siberia gas trunkline and its supply of gas to China was signed in May 2014 by Chairman of Gazprom’s Management Committee Alexey Miller and Zhou Jiping, former Chairman and current General Manager of the CNPC. It stipulates that Gazprom will supply 38 billion cubic meters of natural gas to the CNPC annually for 30 years, according to Gazprom’s Information Directorate.

 

Image sourced from Gazprom via Reuters via Business Insider: http://www.businessinsider.com/russia-turkey-black-sea-pipeline-2015-1

Image sourced from Financial Times: https://ig.ft.com/gazprom-pipeline-power-of-siberia/

 

Who’s who?

Gazprom, a portmanteau of the Russian words “gázovaya promýshlennost’” (gas industry), is the post-Soviet successor to the Ministry of the Gas Industry of the Soviet Union and one of the world’s largest natural gas corporations. The Russian Federation holds just over 50 percent stake in the company, and its holdings include large Russian national media outlets and shares of other major international energy firms, including the Austrian oil and gas company OMV. In the first semester of 2017, Gazprom supplied 37.4 percent of all natural gas imported by the European Union (EU) from extra-EU countries according to Eurostat, the EU’s Directorate-General for the collection and analysis of statistical data.

Like Gazprom, the China National Petroleum Corporation is the successor to a former state energy agency, the Ministry of Petroleum. Today it deals in oil, gas, petrochemicals and other petroleum products and is the parent company of PetroChina, one of the largest publicly traded oil companies in the world with a market capitalization of about $232 billion in March 2018. Its international operations began in 1993 and has since expanded with projects in the Caspian Sea region, the Middle East, Russia, Canada, Venezuela, Mozambique and South Sudan.

Natural gas

Natural gas exists in nature as a hydrocarbon gas mixture primarily made of methane (CH4) but often includes ethane, propane, butane, carbon dioxide and other gases. It can be found underground beneath layers of rock above or near oil deposits and in shale formations, sandstone beds and coal seams. The uses of natural gas include residential heating, electricity generation and limited use as a fuel for natural gas vehicles. Once processed, natural gas may be chemically converted into other forms such as compressed natural gas (CNG) and liquified natural gas (LNG). Natural gas and its related products emit fewer greenhouse gases like carbon dioxide (CO2) in comparison to other fossil fuels like oil or coal.

A Brief History of Energy Cooperation

According to Gazprom’s Information Directorate’s website promoting the pipeline, the Power of Siberia “will transport gas from the Irkutsk and Yakutia gas production centers to consumers in Russia’s Far East and China (eastern route).” The pipeline’s total length will be around 4,000 kilometers with a diameter of 1,420 millimeters and be capable of exporting 38 billion cubic meters per year. While one of the more economically viable and logistically feasible Russian projects currently planned, this pipeline is by no means the only one of its kind. The natural gas pipeline, formerly known as the Yakutia–Khabarovsk–Vladivostok pipeline, partly runs along the first East Siberia–Pacific Ocean oil pipeline which transports oil from the Tomsk Oblast and Khanty–Mansi Autonomous Okrug in western Siberia through Skovorodino to the Chinese city of Daqing.

     

Image sourced from Stratfor Worldview: https://worldview.stratfor.com/article/chronology-russias-rekindled-alliance-china

 

Needs and Expectations

While some limited energy cooperation has recently been the norm between China and Russia, certain international and domestic developments have also pushed these two states closer together. China demands large amounts of energy for many reasons, including strong population growth and plans to develop the rural and mountainous western and northern regions, such as Xinjiang, Qinghai and Inner Mongolia. For very large countries like China, the composition of the national energy mix can be as important as the quantity of energy itself, since overdependence on one source of energy can leave a country vulnerable to sudden global market shifts or perfidious actors. For years China has relied on fossil fuels like oil, gas and coal for industry and domestic energy use, the adverse environmental effects of which are sometimes highly visible, such as Beijing’s notorious smog. Factors impacting China’s drive to diversify its energy mix include the reduced greenhouse gas emissions of natural gas in comparison to coal and the vulnerability of China’s maritime supply chains to foreign actors.

“I don’t think this is viewed by China as an economic project, though maybe they like to pitch it like that,” former RAND Corporation author James Bartis said in an interview with the Tangent. “In terms of real benefit, I think the Russians get the real short term benefit. From the Russian perspective, their benefit is a pipeline to the ocean, since they don’t want one buyer. If there’s only one customer, then they [China] have a strong position. Russia is interested in money, and China is interested in their national security, especially given their behavior in the South China Sea. Their energy pipelines are extremely vulnerable to blockade.”

A geographically close, able and willing energy exporter like Russia would appear to be just the solution to China’s energy security issues. The Russian economy is struggling under the continuing international sanctions led by the United States, European Union and other countries imposed for the annexation of Crimea in 2014, a dismal investment environment and cheap world oil prices in part due to the export of U.S. shale oil and natural gas since the mid 2000s. Western sanctions in particular have slowed Russian economic growth and are continuing to include more firms and individuals—as recently as Apr. 6, 2018, Alexey Miller, chief executive of Gazprom, was personally sanctioned by the U.S. along with a host of other Russian oligarchs. Although demand for Russian natural gas has so far remained steady in Europe, quickly deteriorating relations with the West have prompted a search for new markets. The first and most obvious market for energy exports Russia would like to develop is China, as well as Japan, the number two and number one importers of LNG worldwide, respectively. However, despite any rapprochement with China, Russia derives greater benefit from access to global markets, particularly by extending pipelines to its only major city in the Far East and only warm water port Vladivostok.

While the Power of Siberia pipeline and gas supply it would provide seem to be a logical mutually beneficial arrangement, it’s not absolutely certain the project would necessarily be fulfilled exactly as specified in writing.

“This is probably one more of China’s bad investments in energy, like South Sudan or Venezuela. Russia is not a place where you can count on the rule of law. If there’s a cheaper way to get LNG or oil, China will break the contract, or Russia will break the contract. An act of God can happen and a pipeline blows up,” Bartis added, referencing the explosion of the Central Asia-Tsentr-4 natural gas pipeline from Turkmenistan to Russia in April 2009. Russian and Turkmen state and energy sector officials blamed each other for the explosion.

Russia’s Eastern Pivot

The Power of Siberia is more than a commercial transaction made out of mutual economic benefit in that it carries broader geopolitical implications for both Russia and China. The Shanghai Cooperation Organization (SCO), an international organization of Eurasian states, originated as the Shanghai Five, initially created by China, Kazakhstan, Kyrgyzstan, Russia and Tajikistan in 1996 and has promoted political and economic cooperation and mutual security as well as cooperation in a variety of other spheres since 2001. Since then, bilateral relations have improved significantly from cautious to strategic to exceptional, at least in rhetoric.

In July 2017 during multi-day negotiations in Russia, Chinese and Russian leaders Xi Jinping and Vladimir Putin released multiple joint statements confirming their agreement on a host of issues, including security on the Korean Peninsula, the state of international affairs and deepening cooperation generally. The most significant and publicized cooperation between the two powers–among others–is the China-led Belt and Road Initiative, which includes lofty promises to connect African, Central Asian, East Asian and European markets across overland and maritime routes to spur trade and economic growth. While the actual Chinese investments in Russian infrastructure differ somewhat from the ambitious joint statements made by both countries in support of the project, strategic energy cooperation, at least in some instances, has been an area with some potential for mutual benefit.

The State of Play

Essentially, there are a few different dynamics resulting in the recent increase in Sino-Russian strategic energy cooperation, including but not limited to the Power of Siberia natural gas pipeline. International sanctions have seriously strained the Russian economy and worsening relations with the West have produced negative expectations about any of those sanctions being lifted in the short or medium terms. These dynamics have forced Russia to expand its customer base and shift eastwards to China, another very large market and potential geopolitical ally. This is not to mention the brewing political discontent in Russia, also due to economic hardships facing Russian society in addition to other domestic factors, that has served as an impetus for increasingly bold adventurism in foreign policy matters. China, as the second largest economy by gross domestic product (GDP), the largest energy importer and largest national population in the world, is highly invested in obtaining consistent and reliable energy sources. For a global political and economic power like China, energy security is inextricable from national security and is therefore of the utmost importance. For now, a Sino-Russian energy alliance appears to be possible, but to what extent and for how long remains to be seen.

 

Information for this story was sourced from the BBC, Bloomberg, the Center for Strategic and International Studies, The Diplomat, Eurostat, the Financial Times, Forbes, The Guardian, the Gazprom Information Directorate, the Oxford Institute for Energy Studies, Radio Free Europe/Radio Liberty, Reuters, the Shanghai Cooperation Organization, Stratfor Worldview, the U.S. Energy Information Administration and the World Bank. Many thanks to James Bartis for his contribution and insights.

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