China’s ravenous demand for energy and Russia’s huge supply of nearby oil and gas are clearly complementary, but until recently, large Sino-Russian energy agreements proved elusive. On May 21, however, the China National Petroleum Corporation (CNPC) and Russian energy giant Gazprom finally signed a 30-year, $400 billion deal that will see up to 38 billion cubic meters of Russian gas go to China each year.
Richard Weitz
The gas deal has been long expected. The idea of sending Russian gas to China by pipeline was first mooted in the 1990s, at the same time that similar proposals to ship Russian oil to China were assessed. Chinese and Russian energy managers have been negotiating possible gas deals since 2004, when CNCP signed a strategic partnership agreement with Gazprom.
Chinese policy makers have long sought Russia’s oil and gas, if at the right price. In particular, PRC policy makers would like to use more gas and less coal to counter the country’s terrible pollution problem and reduce its emission of greenhouse gases. Furthermore, despite receiving large oil shipments from the Persian Gulf and increasing amounts of natural gas from Central Asia, Beijing strives to diversify foreign energy sources to limit China’s dependence on any single exporting country or region.
Nonetheless, for about a decade, China and Russia have proved unable to agree on a price formula for the gas deliveries. PRC negotiators sought to buy the gas at the lower prices that Chinese utilities are allowed to charge their domestic consumers in line with domestic price controls. In addition, Chinese negotiators saw no reason to pay more for Russian gas than they pay for gas imports from Central Asia. Russian negotiators, on the other hand, argued that China should be charged as much as their European clients and should help defray the cost of building the new pipelines and other infrastructure required to move the Russian gas from Siberia to China.
In the end, the Russians, aware that the growth of liquefied natural gas (LNG), the renewed European efforts after the Crimea crisis to reduce their reliance on Moscow-provided energy, and other developments could lead to a decline in world gas prices, appear to have yielded on the price of gas. Meanwhile, China will help the Russian companies develop the two new gas fields in eastern Siberia and construct the new pipelines and related infrastructure by providing a prepayment of some $22 billion.
In agreeing to build the pipelines, China and Russia have essentially committed to a long-term energy partnership. It is noteworthy that this mega-deal builds on earlier massive oil sales agreements, especially the 2009 and 2013 contracts between China and Rosneft, Russia’s main oil exporting company. These deals all followed the “win-win” formula by which China loans Russian firms the money, often as large advance payments, they need to develop new energy supplies and transport them to China. Russian leaders, in turn, guaranteed energy deliveries to China through long-term contracts and the construction of immovable pipelines.
Russian regulators have also been allowing Chinese companies to assume a larger economic role in the Russian and Central Asian energy markets in order to secure Chinese capital to help Russia and its allies develop new energy production. Chinese and Russian energy companies are partnering to pursue joint ventures in Siberia, the Caspian Basin region, and even the Arctic.
The United States has only limited indirect dealings with the Russian and Chinese gas sectors. Moscow has blocked attempts by the largest U.S. energy corporations to purchase significant stakes in Russian energy companies. On the other hand, Gazprom abandoned plans to export LNG to the U.S. West Coast due to the growth of U.S. gas fracking. The CNPC most often competes with other Asian and Russian companies, not American ones, in its search for energy supplies in Central Asia and Africa.
China does not purchase U.S. oil or natural gas, and was unlikely to do so even without the recent Sino-Russian deal. Although many believe that such exports provide net gains to the United States, fears prevail among Americans that the exports could raise U.S. energy prices. Though most studies conclude that any rise would be low, Congress has declined to remove the ban on U.S. crude oil exports, while U.S regulators have approved construction of only a half-dozen LNG plants.
Besides this, it takes years to construct such facilities, which are costly and face stiff opposition from key domestic interest groups. U.S. manufacturers fear that exports could adversely impact their production costs, while environmentalists, though aiming to reduce U.S. coal production and use, worry about water pollution and other ecological challenges presented by gas fracking and shale oil production.
The controversy and resulting delays means that U.S. hydrocarbons will not soon displace Russian oil and gas sales in Asia. Instead, the U.S. will need to work with regional partners, including China, to encourage price competition, competition, and transparency.
Richard Weitz is a Senior Fellow at the Hudson Institute.
