The China-Russia Gas Conflict
2012-12-13 by Richard Weitz
The protracted negotiations concerning China’s possible purchase of an enormous volume of Russian natural gas has been a prominent agenda item at Russian-Chinese leadership summits for years.
Expectations had been high for years that an agreement might soon be imminent, but the parties have proved unable to finalize the deal, further postponing the date when the pipeline might be built.
PRC policy makers are eager to expand their natural gas imports.
As a result of China’s surging economy, the country has become one of the world largest purchasers of natural gas and other foreign energy sources. Rapid economic growth has fueled energy demands that outstrip China’s domestic energy supplies. Although the government has tried to improve energy conservation and expand the use of nuclear and renewable energy sources, the PRC will still need to import enormous quantities of oil and gas for the foreseeable future. In this regard, the Chinese are seeking to diversify their foreign energy sources to limit their dependence on any single exporting country or region.
In principle, Russia should find a natural place within this framework.
The Russian Federation possesses the largest natural gas reserves in the world. Many of Russia’s new and untapped gas fields are in eastern Siberia and the Russian Far East. These locations lie closer to China than the older fields that now provide gas primarily to consumers in Russia and Europe.
Despite these natural advantages and their mutual interests in increasing bilateral energy cooperation, the Chinese and Russian governments have made only limited progress in moving beyond rosy statements of principles and vacuous memoranda of understanding to the initiation of actual energy projects.
Various technical obstacles, pricing conflicts, and mutual suspicions have historically kept Chinese purchases of Russian energy at relatively low levels. Frequent delays in shipments on the part of the Russians and attempts to leverage the competing interests of the Chinese, Asian, and European markets off each other have prevented Chinese policy makers from regarding Russia as a reliable long-term supplier.
Perhaps the most serious impediment to large deliveries of Russian natural gas to China is the underdeveloped transportation infrastructure connecting the two countries.
During most of the Cold War, the border between China and the various Soviet republics was sealed and heavily militarized. In addition, the Soviet energy pipeline network flowed from east to west since Europeans were the main foreign purchasers of the gas in Russia, Azerbaijan, and Central Asia. It has only been in the last decade that Russian energy planners have made a comprehensive effort to send gas and oil eastward toward the expanding markets of East Asia.
Russian energy giant Gazprom and the Chinese National Petroleum Corporation (CNPC) have been negotiating possible deals since 2004, when they signed a strategic partnership agreement. During Putin’s March 2006 trip to Beijing, Gazprom and the CNPC signed a memorandum of understanding about constructing a 6,700-kilometer Altai pipeline to deliver Russian natural gas to China. The current talks envisage a 30-year contract in which Russia would supply some 68 billion cubic meters of gas annually.
But Gazprom has repeatedly delayed started construction of new gas pipelines because, despite years of negotiations, Chinese and Russian negotiators have proved unable to agree on a price formula for the gas deliveries. Without an agreed delivery price, Gazprom is unwilling to construct an enormously expensive pipeline, which, in the worst case of continued deadlock in the Russia-China negotiations, would remain idle.
According to media reports, Chinese negotiators are offering about $250 per 1,000 cubic meters of gas, whereas Russian negotiators are demanding approximately $350.
In essence, Russian negotiators want Beijing to pay world market prices, whereas the Chinese insist on receiving a healthy discount for their large purchases.
Given the large volumes at issue, in which even a single dollar difference could amount to billions of dollars over the life of the contract, each side is naturally fighting hard for their positions.
To support their arguments, Russian negotiators point out that their natural gas could flow westward to Europe as well as eastward to other Asian countries besides China. They also note that Russia’s natural gas supplies, while enormous, are not unlimited, with the implication that Beijing needs to compromise or risk losing out.
PRC negotiators parry by pointing to the emergence of shale gas as a major fuel source in Western countries and the growing international volume of liquefied natural gas (LNG) potentially available to PRC ports.
In addition, China has begun receiving large-scale deliveries of natural gas from Central Asia after the PRC financed construction of the first east-west energy pipeline in Central Asian history. This pipeline should deliver as much as 40 billion cubic meters of natural gas from Turkmenistan alone annually. Turkmenistan has offered China more gas than the Russians have ever considered providing the PRC.
Both parties are considering following the precedent they established by their April 2009 oil-for-loans deal. According to its provisions, the Development Bank of China lent Russia’s state-run energy companies the money they needed to build and operate a 67-kilometer branch pipeline off the East Siberia Pacific Ocean (ESPO) oil pipeline to the Russian-Chinese border town of Xing’an. CNPC then built a 1,000-km pipeline from there to oil refineries in Daqing.
If Russian and Chinese negotiators agreed on a similar gas arrangement, China would lend Gazprom the money required to construct the Altai pipeline in return for guaranteed shipments of natural gas to China.
Looked at from a different perspective, this deal would involve China’s purchasing the gas from Gazprom in return for Russia’s committing to use some or all of this money to construct the pipeline to ship the gas to China.