Diplomatic relations between Moscow and Beijing have significantly improved over the past couple of decades. During the Cold War, the Soviet Union and China were on the brink of war which the U.S. exploited with the ‘Opening of China' during the Nixon administration. However, recent geopolitical and economic developments have created a new strategic environment: Russia controls some of the world’s largest reserves in terms of resources such as oil and gas while China’s expanding economy requires ever-larger volumes of raw materials.
The crisis between Russia and the West has created a rift between Moscow and Europe, its most important customer regarding natural gas. To maintain a steady flow of demand for Russian gas, a political decision was made to speed up negotiations between the state-sponsored companies Gazprom and China National Petroleum Corporation for new energy infrastructure. A historic deal was struck in 2014 concerning the Power of Siberia pipeline valued $400 billion for 38 bcm of gas over 30 years. While the first delivery of gas is set on December 1st, negotiations are ongoing for another pipeline which would make China Gazprom's most significant customer within a decade.
A critical moment in time
The Power of Siberia-2 or Altay pipeline is not a new idea. The infrastructure has been discussed on both sides of the border but with no actual plan for construction. New developments, however, have significantly increased the need for additional capacity. The most important circumstance is the fast-growing demand for natural gas in China for which domestic production is not sufficient.
Due to environmental reasons, Beijing has decided to implement the coal-to-gas policy which has increased demand by 23 percent from 195 bcm in 2015 to 240 bcm in 2017. The import of relatively expensive LNG increased by 44 percent in 2018 compared to 2017 to approximately 55 Mton or 75 bcm. Currently, China only imports pipeline gas from Central Asia which has reached 51 bcm in 2018.
Due to the expectation that demand will keep on growing, Beijing has been looking for an alternative to LNG imports. Last year, during the economic forum in Vladivostok, Presidents Putin and Xi committed their state gas companies to reopen negotiations on a new pipeline option from Russia to China, the Power of Siberia-2 pipeline. Diversification in China’s most remote western regions would improve energy security by decreasing dependence on Central Asia.
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The existing infrastructure in the region, the so-called Central Asia-China pipeline, consists of the lines A, B, and C with a maximum capacity of 55 bcm. A project to extend the pipeline with line D is shelved due to specific concerns on the Chinese side. Beijing is worried about overdependence on the region. CNPC’s statement accused “frequent equipment failures” in Turkmenistan of causing shortages in China. Also, Kazakhstan is suspected of diversions of gas and the resulting pressure drops in China during the winter of 2012-13.
Gazprom’s long-time dream
It is painfully evident for Moscow that Europe has become a difficult market for Russian gas. The issue of energy security is high on the European political agenda. The construction of Nord Stream 2 is facing significant pushback from European politicians in several countries as well as Washington which has threatened with sanctions to derail the project. Recently, EU energy ministers have made an agreement that could delay the completion of Nord Stream 2, but probably not stop it. Also, in the case of Turk Stream Gazprom faced significant opposition. Despite a high probability that both projects will be completed, the limits of Russian gas in Europe is within sight.
Therefore, diversification is also high on the Russian agenda. Currently, Germany is the biggest buyer of Russian gas. That could change when the second interconnector with China is built. Energy security for Russia entails a steady flow of revenue for the state coffers. Furthermore, Gazprom has also been pushing for the western route which is much cheaper to construct because of pre-existing infrastructure in Western Siberia.
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Despite the ever-closer political relations between Moscow and Beijing, the Chinese are notorious for being formidable partners when it comes to negotiations. Although the current political climate is benefiting negotiations, several wild cards remain. China’s ongoing trade talks with the U.S. could alter the situation. Beijing could compromise on the trade imbalance through an agreement to buy additional American LNG. That could be bad news for alternative suppliers. However, it remains the question whether Beijing is willing to commit itself into a position of vulnerability vis-à-vis its strategic competitor.
By Vanand Meliksetian for Oilprice.com
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