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The “Polar Silk Road” Could Be A Gamechanger For Natural Gas

It’s been well over a year since the then-United States Secretary of Defense Jim Mattis accused Russia and China of being “revisionist powers” each working its way toward making a power grab on the world stage and announced that the U.S. would be shifting its international relations focus away from fighting terrorism and instead prioritize what Mattis referred to as a "great power competition." Now, 17 months later, it looks like Mattis’ nightmares are coming true as Russia and China have increasingly worked together in defiance of the Trump administration in a kind of diplomatic ‘marriage of convenience’.

Just this month, Chinese President Xi Jinping made his eighth official visit to Russia in a trip highly publicized in both Russian and Chinese media. “This year marks the 70th anniversary of our diplomatic ties and China’s ties with Russia are deepening at a time of profound change in the global geopolitical landscape,” remarked former Chinese ambassador to Britain Ma Zhengang, as quoted by the South China Morning Post.

One of the most current examples of this newly strengthened relationship between Beijing and Moscow is a new joint venture between state-owned shipping corporations in Russia and China to create a “Polar Silk Road” in the Arctic Sea. a year ago, officials in Beijing announced that China would be pursuing investment across the Arctic Route to encourage commercial shipping through the northern passage as a part of the country’s Belt and Road Initiative. Belt and Road is a massive undertaking involving investments programs worth trillions of dollars, which will go toward connecting Asia and Europe by sea, rail, and road to promote more trade between the continents.

This week, reporting by the Wall Street Journal this week tells us that “China is breaking into Arctic transport through a joint venture between the country’s biggest ocean carrier, Cosco Shipping Holdings Co., and its Russian counterpart PAO Sovcomflot to move natural gas from Siberia to Western and Asian markets.” Both China and Russia are members of the Arctic Council, which the Wall Street Journal describes as “an intergovernment forum [...] which considers development issues and sailing rights as the polar ice recedes” before going on to say that China, in particular, has “made investment [in Arctic shipping lanes] a priority to advance its energy and shipping interests”.

The new venture will ship liquefied natural gas from central northern Siberia’s gargantuan Yamal LNG project to a laundry list of destinations including Northern Europe, Japan, South Korea, and China. The initiative will begin with a fleet of a dozen ice-breaking tankers, and Cosco’s China Shipping LNG Investment Co. will reportedly operate another nine tankers. Related: Climate Change Could Trigger Global Financial Crisis

“We [China] imported about 57 million tons of LNG last year and we are looking for a steady supply of around four million a year coming from Yamal,” a Chinese shipping executive told the Wall Street Journal. “We also look to move container ships through the northern sea route as warming temperatures melt the ice making it easier to navigate.”

This move comes on the back of months of Russian gas flooding European markets, keeping gas prices low, exacerbating an already-existing gas glut in the continent, and at least partially edging the United States out of the European natural gas market. As reported by Bloomberg, experts at Citigroup surmise that Russia’s increased shipments of natural gas to Europe are a kind of stress test for the United States. A Citigroup report says that Russia is intentionally keeping gas prices low because Moscow is likely “testing the response of the global gas market in a low price environment, especially U.S. LNG export elasticity.”

Now that Russia is strengthening its natural gas trade with China on top of its aggressive flooding of European markets with its cheap liquefied natural gas, the United States has more cause for concern than ever. Especially when taking into consideration that China’s thirst for natural gas is “almost infinite” as it tries to move away from its long legacy of dirty coal-based power and its middle class continues to boom, along with its demand for energy.

By Haley Zaremba for Oilprice.com

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Haley Zaremba

Haley Zaremba is a writer and journalist based in Mexico City. She has extensive experience writing and editing environmental features, travel pieces, local news in the… More

Comments

  • Mamdouh Salameh - 15th Jun 2019 at 1:36pm:
    The strategic alliance between Russia and China will shape the global economy and the geopolitics of the world in the 21st century converting it from a unipolar to a multipolar world.

    Relations between China, the world’s largest economy based on purchasing power parity (PPP) and Russia, the world’s energy superpower, are deepening at a time of profound change in the global geopolitical landscape. This is a marriage made in heaven rather than a “marriage of convenience” as Western media like to depict it.

    One of the latest manifestations of cooperation between Russia and China is a new joint venture between state-owned shipping corporations in Russia and China to create a “Polar Silk Road” in the Arctic Sea. The new venture will ship liquefied natural gas (LNG) from central northern Siberia’s gargantuan Yamal LNG project and Arctic LNG 2 project to Western and Asian markets.

    China is pursuing investment across the Arctic Route to encourage commercial shipping through the northern passage as a part of its Belt and Road Initiative (BRI). The BRI is a massive undertaking involving investment programmes worth trillions of dollars, which will go toward connecting Asia and Europe by sea, rail, and road to promote more trade between the continents.

    China imported about 57 million tons of LNG last year and is looking for a steady supply of around four million a year coming from Yamal. China’s thirst for natural gas is almost infinite as it tries to move away from coal on environmental grounds.

    With Russia strengthening its natural gas trade with China on top of its supplies of cheap LNG to Europe and with China hiking tariffs on US LNG, the United States will face formidable hurdles in selling its LNG in Europe and also in the Asia-Pacific region.

    Russia is already the biggest natural gas supplier to China bolstered by the completion of the Power of Siberia 1 gas pipeline by the end of this year and soon it will become the biggest LNG supplier as well.

    Moreover, China has been investing heavily in Russia’s LNG projects under its (BRI). Russia has become one of the biggest recipients of Chinese investment receiving so far $46 bn in Chinese funding for BRI projects, the latest of which was the Yamal LNG project and the Arctic LNG 2 in Russia’s Yamal Peninsula.

    The trade war could adversely affect US LNG projects. Without both Chinese funds and guaranteed Chinese LNG demand, some of the US LNG projects could stall.

    Sensing an opportunity not to be missed, Russia’s LNG company Novateck expects to increase its LNG production capacity to 70 million tons per year (mtpa) by 2030 up from 57 mtpa. That should propel Russia to the third global LNG production slot behind Qatar and Australia possibly overtaking the United States in the mid to later part of the next decade.

    The BRI with which more than 130 countries have already signed contracts of cooperation enables China to become almost totally integrated in the global trade system. This explains why the trade war between the US and China has so far hurt the US economy far more that China’s.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
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