Foreign Policy Blogs

Energy: The tie that binds Beijing and Moscow

Screen Shot 2014-06-26 at 11.09.10 AM

President Vladimir Putin (left) and President Xi Jinping (right) at a May 21, 2014 signing ceremony inking a long-sought deal between Russia’s natural gas giant, Gazprom, and the CNPC for China (Photo: AP Photo/RIA Novosti, Alexei Druzhinin, Presidential Press Service)

Russia and China last month agreed to a landmark natural gas deal nearly a decade in the making that will put the two in partnership for the next 30 years.

Russia’s energy giant, Gazprom, and the China National Petroleum Corp. signed the much-anticipated $400 billion natural gas deal on May 21. The exact pricing remains a secret, but what has been reported so far is this: 38 billion cubic meters of natural gas a year will flow from two fields in Siberia, 2,500 miles south to China’s energy-hungry industrial region. Through tough negotiations and urgency from Russia, predictions are the Chinese secured a $350 per thousand cubic meter price tag, cheaper than the $380 rate Gazprom sells to Europe. In exchange, part of the deal has China financing $50 billion of pipeline infrastructure to transport gas to its borders.

As of today, the deal would meet a quarter of China’s natural gas demand — only 10 percent when the pipelines are flowing in 2020 — but there is the possibility of expanding to 60 billion cubic meters a year.

Beijing and Moscow both had their reasons for seeing the deal through, but it’s also possible to see a convergence of interests in developing a partnership through energy. China uses natural gas for five percent of its energy production, according to the EIA, but is looking to move away from dirtier fossil fuels. Its well-known pollution problem stems from widespread burning of coal and petroleum and leaves 95 percent of its country shrouded in haze. Fueling its industrial region with cleaner-burning natural gas is a promising option for the Chinese government, which has seen protests and declining tourism numbers in reaction to its year round smog. It’s also made places like Beijing, once a desirable assignment for expatriates, more of a hardship post.

The deal was also a matter of convenience for China. It has enjoyed a cheaper price for natural gas from fields in Turkmenistan for years, and the Asian natural gas market continues to bloom. The route the natural gas must travel — precarious sea-lanes and a volatile central Asia — makes a supply disruption more likely than getting it directly from the north.

The deal was more of necessity for Moscow. Russia’s economy, dependent on natural gas exports for 50 percent of government revenue, needed a quick boost to its long-sputtering economy. The International Monetary Fund predicted a meager .2 percent increase in Russia’s economy for 2014, and, due to the Ukrainian crisis, investments from the West are likely to be scarce. The deal struck with Beijing is only a quarter of what Russia makes selling natural gas to Europe. Using energy as a political football and cutting that supply would only hurt the Russian economy more.

Morena Skalamera, a fellow at the Geopolitics of Energy Project at Harvard, told The New York Times, “The rapid rise of U.S. natural gas is giving Europeans genuine market options. Many are opting out of the grip of Gazprom. The result? Russia is looking for a new cash cow, turning its gaze east.”

Though the deal between Beijing and Moscow is energy related, it’s not too difficult to draw lines to a mutual interest in challenging the U.S. and Europe.

China is wary of the U.S. for its support of Japan, criticism of Chinese actions in the South China Sea, and its hard stance on cyber theft. Russia is at odds with the U.S. over sanctions implemented in reaction to Russia annexing Crimea, and it feels the U.S. took advantage of their Security Council vote to aid Libyans in their recent revolution by implementing a regime change.

Aurelia Condrat wrote in a blog for the Huffington Post that she sees the conclusion of the energy deal as Russia’s way of “pushing back against the U.S.”

“With this deal, Russia wants to make a point of showing that the U.S. and its N.A.T.O. partners are in decline,” she said.

As the U.S. watches Beijing-Moscow relations warm over natural gas from afar, many are say Washington has only one real option: export its own.

The recent discovery of massive fields of natural gas throughout the country led President Obama in 2012 to predict the U.S. as becoming the “the Saudi Arabia of natural gas.” It’s been a slow start out of the gate, however, with only seven of 31 liquefied natural gas export (LNG) licenses approved since 2011, six conditionally.

U.S. lawmakers from across the aisle have been ratcheting up support for getting U.S. natural gas on the global market, especially since the China-Russia deal was announced.

Republican Senator from North Dakota John Hoeven told The Hill the natural gas deal gives Russia leverage in upcoming discussions this week with President Obama and German Chancellor Angela Merkel over the continuing crisis in Ukraine.

“This gives Russia another option. It strengthens their hand vis-à-vis what they decide to do in Eastern Europe,” Hoeven said. “And it makes it even more imperative that we advance our legislation to allow exports of LNG to Europe so that they have alternative sources.”

Senator Mark Udall (D-Colo.) said the energy deal should make the U.S. react quickly to selling its supply overseas. He’s introduced legislation to speed up the lengthy process for approving LNG export terminals.

Now that Beijing and Moscow are bound through energy cooperation, will this lead to greater partnership between the two biggest contenders able to challenge the West? Some analysts believe this is only the beginning.

“From the perspective of international relations, this deal also signals a deepening of energy ties between Russia and China,” Wood Meckenzie’s consultant group told the Natural Gas Intelligence. “They now cooperate across a range of different commodities and have established a broad base for further increases in trade in oil, gas, LNG, coal and electricity.”

 

Author

Jordan Stutts
Jordan Stutts

Jordan Stutts is a finance reporter for business journal PEI Media covering global infrastructure transactions, private investments in energy and transportation funding. He previously worked as an associate producer for FPA’s Great Decisions television series and covered local news in Charlotte, NC. You can follow him on Twitter @jwstuttered or check out his portfolio at www.jordanstutts.com

americasdiplomats_socialmediaasset