Author: Keun-Wook Paik, OIES
For 10 years after 2000, cooperation between China and Russia in the natural gas sector was very limited.
Owing to political problems arising from Russian company TNK-BP’s ownership of the Kovykta gas field in Eastern Siberia, Moscow decided to prioritise the development of Chayandagas and the surrounding four major gas fields in the Sakha Republic. These were all allocated to Russian company Gazprom, and even though the 1.7 trillion cubic metres (tcm) of reserves in these fields is not as big as Kovykta’s 2.0 tcm, Chayandagas alone is plentiful enough to spur Gazprom to pursue a 30 billion cubic metres/year (bcm/y) long-distance pipeline development. Even though Kovykta is under Gazprom’s control, Russia’s current priority is to develop Chayandagas and to export to Asia first.
China’s demand for gas has increased significantly during the 2000s, and the development of the West–East Pipeline (WEP I) across the country during the first half of the decade laid solid ground for China’s natural gas expansion. This has now been augmented by the construction of WEP II, to import a large volume of gas from Turkmenistan, as part of a WEP corridor (including WEP III, IV and V) during the current 12th Five-Year Plan.
However, expectations for natural gas sector cooperation between Russia and China are still not promising. This is especially given Gazprom has prioritised gas exports from the Russian federal subject of Altai (in West Siberia) to west China — something not regarded favourably by Beijing given it would much prefer that Russia prioritised the supply of East Siberian gas to north-eastern China. And since China has prioritised Central Asian (in particular Turkmenistan) gas as an equity gas supply source, Altai gas was not a ‘must-have’ option for China. Altai gas must overcome this problem if it is to access the Chinese gas market by the mid-2010s. Even if the current price issue were to be settled this year, supplying Altai gas by Gazprom’s target of 2017 will not be easy, with 2018–2020 being a more realistic date.
Gazprom’s ‘swing supplier’ strategy of prioritising Altai rather than East Siberian gas exports is making Beijing planners very uncomfortable, as China’s gas supply is being shared with the European market in accordance with Gazprom’s tactics. After the global financial crisis of 2008 the EU’s appetite for Russian gas contracted and this drove Gazprom to a more aggressive Asian gas export policy. Given East Siberia remained without a developed pipeline structure, Altai gas exports fitted neatly into Gazprom’s strategy of switching its European gas exports to China. Similarly, the Eastern Siberia–Pacific Ocean oil pipeline has allowed Russia to export its crude oil to the Asian market directly, thereby alleviating Russia’s dependence on European buyers.
Further complicating the Altai-to-west-China pipeline development is that Beijing’s need for Russian gas is not as desperate as its need for Russian oil. Natural gas is still considered the most expensive fuel source for power generation, accounting for only around 15 per cent of total gas consumption in China. It also tends to be treated as a peak load energy source, not a base load source. Though Beijing claims that more natural gas will be used in the gas-for-power sector in the future, this would be prohibitively expensive without reform of the distorted electricity, gas and coal pricing system.
These issues lie behind the state-owned China National Petroleum Corporation’s (CNPC) inability to accept the oil-related border price which Gazprom is demanding. Chinese planners find Gazprom’s price excessive because CNPC cannot increase domestic gas prices, which are strictly controlled by the Chinese National Development and Reform Commission’s price department. When it became clear that this price stalemate would continue, Beijing immediately made the decision to construct the WEP II pipeline to bring gas from Central Asia. The equity gas option offered by Turkmenistan was enough to compensate for the burden of the high border price for imports (as it can make profits from the upstream sector based on its equity stake).
Gazprom’s current stance is that Russia will move ahead with exporting its oil and Liquid Natural Gas (LNG) to ‘Asia’. It takes the view that if China wants to buy, that is fine, but if not other countries will be happy to do so. At the same time Russia (unlike the Central Asian states and many other countries in the world) refuses to allow China to own any part of the field and pipeline development. This rigid stance is central to why Beijing has not accepted Gazprom’s commercial terms.
Western media and energy security specialists argue that Russian President Vladimir Putin is using gas exports as a blackmail weapon against European buyers. When Russia has suspended its gas supply to Ukraine or Belarus, Putin has threatened to re-direct the gas exports to China. To date such threats are only verbal, but they will become much more real once the necessary Altai pipeline infrastructure is completed. Once gas exports via the Altai route to China begin, western media will point out how the Altai export option enhances Russia’s negotiation position vis-à-vis European buyers. But Chinese planners should not be blamed for ‘robbing’ the Europeans of their gas when they would prefer to buy from East Siberia, not Altai in West Siberia.
The key point is that the Chinese do not need Altai for the WEP system to work because they can obtain Central Asian gas. They do need East Siberian gas — which currently lacks pipeline infrastructure — because regional gas capacity in the three north-eastern provinces of China is small and, without access to East Siberia or Sakhalin, the alternative is large-scale LNG imports.
Sino–Russian gas cooperation in the first decade of the century was so limited because Russia tried to replicate its experience with oil exports but found China unwilling to agree. This unwillingness was due to four main factors. First, Russia refused to allow equity in fields or pipeline projects and therefore refused China any control in the value chain. Second, Russia demanded unattractively high prices. Third, China had alternative import options (the Central Asian Republics, Myanmar and LNG imports) as well as the potential to expand domestic production. And finally, there was a lack of trust on both sides. Russia wanted to avoid depending completely on China as a market and China wanted to avoid over-dependence on Russia as a source of supply. The failure of the price negotiations is a reflection of all of these problems.
The current outlook is that Russian gas potential will be largely unfulfilled. The Chinese gas market will thus be much smaller than it could be and large Russian gas reserves will remain stranded for decades. But if the current outlook changes and potential is more completely realised it could make a huge difference to the global gas market. Failure to achieve large-scale gas pipeline imports from Russia will force China to significantly expand LNG imports. This will increase the competition for LNG supplies between importers in northeast Asia (Japan, Korea and Taiwan) and other buyers of LNG in regions as far away as Europe. A failure of the Sino–Russian gas relationship will therefore deprive both countries of a potential win–win solution to their energy and development problems and increase future global rivalry in the market for LNG.