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Tim Daiss

Tim Daiss

I'm an oil markets analyst, journalist and author that has been working out of the Asia-Pacific region for 12 years. I’ve covered oil, energy markets…

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This Landmark LNG Deal Will Change Energy Geopolitics Forever

China’s LNG demand grew by a record 8 mt in 2017 and is set to expand by another record 12 mt this year, making up 50 percent of all global LNG demand growth, energy consultancy Wood Mackenzie said in a new report last week. The country’s spike in LNG usage comes as Beijing pushes forward with its plan to offset coal usage of both industrial and residential end users in an effort to curb rampant air pollution, particularly in its major urban centers. Beijing has mandated that natural gas make up at least 10 percent of its power generation energy mix by 2020, with further earmarks set for 2030.

China’s increased LNG usage is already transforming global markets for the super-cooled fuel and will likely shorten the LNG supply glut by several years from a previously projected time frame of around 2023. The country’s LNG demand is also prompting companies to rethink LNG export project proposals long idled amid the downturn in both global oil and LNG markets from 2015 to 2017.

The final investment decision (FID) reached by project partners in the Canada LNG project in early October is the first major greenfield project to move ahead since 2015. However, more projects are likely to follow given both the rise of LNG demand in Asia, which currently represents 72 percent of global LNG demand. The Wood Mackenzie report added that 2019 could be the largest year for LNG FIDs ever with projects in Russia, Qatar, Mozambique and the U.S. expected to be sanctioned.

However, the growing trade war between Washington and Beijing will also see Chinese companies continue to make a pivot away from U.S. sourced LNG deals, both long-term and spot purchases, to more LNG deals with Russia. Not only will Sino-Russian energy cooperation increase amid President Donald Trump’s hard line over U.S.-China trade differences and his more muscular approach with Beijing over South China Sea differences and increased U.S. support for Taiwan, but these differences will solidify an already growing alliance between Chinese President Xi Jinping and his Russia counterpart Vladimir Putin.

Landmark gas deals

Energy deals will likely follow a similar trajectory to recent agreements between the two sides. In 2014, Russia and China signed a landmark gas deal, with both Xi and Putin in attendance, after a decade of negotiations over import prices and the supply route. Chinese state owned CNPC agreed to purchase 1.3 tcf/y of pipeline gas from Russian state-owned Gazprom for $400 bn over a 30-year period. The now almost completed Power of Siberia pipeline, spanning 4000 km (2500 miles), will connect Russia's eastern Siberian gas fields to northeastern China. CNPC also signed an agreement with Gazprom in November 2014 to import 1.1 bcf/y from western Siberian gas fields. Related: Why Is Canadian Crude Selling For $20?

China is also keen on importing more Russian LNG. Currently, Russia operates two LNG export facilities, including the recently commissioned Yamal LNG project in the Russian Arctic. Yamal LNG effectively doubled Russian LNG output to just over 20 mtpa, making the country the fifth largest LNG exporter in the world. CNPC holds a 20 percent stake in the Yamal project and has a contracted off-take volume of 3 million tons of LNG per year. China’s Silk Fund holds a 9.9 percent stake in the project.

China is interested in becoming a major investor in other Russian LNG projects, including Novatek’s massive 19.8 mtpa Arctic LNG 2 project in northern Siberia which is slated to come on-stream in 2023. Last month, Novatek confirmed that it was considering CNPC as a potential shareholder in the project. Chinese firms will also likely reach agreements with other Russian LNG projects in the future, thereby helping Vladimir Putin’s ambition to compete with Qatar, Australia and the U.S. as the world’s top LNG exporter.

Arctic and military cooperation

Russia and China are also increasing their mutual aims of Arctic development. In 2015, the two sides issued a joint statement committing to work together to turn the Northern Sea Route along the Russian Arctic coast into a competitive commercial sea lane. China's State Council Information Office issued a paper on January 26, 2016 that claimed China as a “near-Arctic state,” adding that the country was interested in encouraging joint efforts to build a joint Silk Polar Road, linking the country with Europe.

Sino-Russian bilateral relations and military collaboration is also deepening as both countries square off against what they see as increased U.S. hegemony, particularly under the Trump administration. Joint Russia-Chinese naval exercises have already been held several times in the East China Sea - an area claimed by both China and Japan that has seen years of military activity by both countries’ naval and air forces.

Related: Is This The Future Of Battery Tech?

Additionally, a Russian-Chinese land based military partnership is intensifying. Last month, China participated in the Vostok 2018 war games, Russia’s largest since 1981 during the Soviet era. The games included more than 300,000 troops – including 3,200 from China and a contingent from Mongolia. After the massive war games concluded, the Washington-based Jamestown Foundation noted that Russian and Western militaries are now training to deploy against each other.

A recent paper “A Wary Embrace” by the Lowy Institute for International Policy asked whether Russia and China would “define the rules of global politics” in the 21st century. The paper said that as Western democracies turn increasingly inward under a backlash against globalization, the notion of a rising Sino-Russian partnership has garnered greater attention.

However, some questions remain just how long these two former rivals will work together, claiming that that the Sino-Russian relationship is limited by national interests, and that they will work together only as long as it remains in their national interests to do so. In essence, this growing bi-lateral relationship could fall apart if put under stress or if developments pivot either side to another, newer potential ally of convenience.

By Tim Daiss for Oilprice.com

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  • Mamdouh G Salameh on October 25 2018 said:
    The huge energy cooperation between China and Russia is cementing an already-powerful China-Russia strategic partnership which will shape the world fwell into the future. It is a partnership that brings together the world’s largest economy and the world’s energy superpower.

    Russia is emerging as the largest crude oil supplier to China. In 2017 Russia supplied an average of 1.55 million barrels a day (mbd) of oil to China or 18% of total Chinese oil imports and this share is growing. There is also the landmark gas deal by which Russia will be supplying 37 billion cubic metres annually (bcm/y) to China through the Power of Siberia pipeline over a 30-year period. China has also a contracted off-take volume of 3 million tons of LNG per year (mtpa) from the recently commissioned Yamal LNG project in the Russian Arctic. Yamal LNG effectively doubled Russian LNG output to just over 20 mtpa, making the country the fifth largest LNG exporter in the world. China’s CNPC holds a 20% stake in the Yamal project with China’s Silk Fund holding a 9.9% stake.

    Moreover, the US intrusive tariffs on Chinese exports and the harsh US sanctions against Russia have united both countries in their determination to stand up to the United Sates’ hegemony and frustrate its strategy of containment of China and its sanctions on Iran’s oil exports. Additionally, Russian-Chinese military cooperation is intensifying.

    The launching of the crude oil benchmark on the Shanghai exchange (the Petro-yuan) with great support from Russia could mark the beginning of the end of the petrodollar which is the core of the US financial system. Since its launch just over six months ago, the petro-yuan has already captured 32% of all global traded oil.

    Some quarters in the West like to portray the Sino-Russian partnership as a ‘marriage of convenience’ probably out of wishful thinking or self-delusion. Others see it as a partnership limited by national interests, and that this growing bi-lateral relationship could fall apart if put under stress or if developments pivot either side to another, newer potential ally of convenience.

    However, both Russia and China rank their ties as the “peak” in mutual history. This can be judged by two analytical frameworks: their converging visions of the future world order and their harmonized national interests.

    The Chinese view on the world order at this historical juncture is shared and dovetailed by Putin’s Russia. Both sides hold the view that Washington’s alienation from both Beijing and Moscow is reflected by the deeply rooted fear of the US losing hegemonic status as the “only indispensable superpower”. The indications of the US fear are plenty. From Beijing’s point of view, the strategy of containment of China and the escalating trade war against it were driven by misguided fear. From Moscow’s perspective, the Western alliance took advantage of post-Soviet chaos to push the Western sphere of influence towards the Russian border.

    Strategically, Russia and China share a strategic vision against the unipolar world: both see the United States in relative decline and the world already becoming multipolar. In the process of mismanaging its decline, the US suffers from a psychological problem that manifests itself in the unfounded fear of power challenge from potential rivals, hence its persistent attempts to hinder their rise. The world is changing and the world order must be revamped. Pax Americana is over and Washington must adjust to the new world.

    In sharp contrast to mutual suspicion and deteriorating relationship between Washington and Beijing, the Chinese-Russian tie has proved to be a stable strategic partnership built on mutual understanding, respect and national interests and also a . healthy check on Washington’s “unipolar folly”.

    In view of the above, Putin will never sacrifice China for the West whom he doesn’t trust.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Bob on October 26 2018 said:
    I agree with Salemeh on his perspective about the threats from the US bringing Russia and China closer to a possible military alliance. I question his faith that there united actions will frustrate the US attempt to block Iran oil sales from the market. It's already been reported widely that Iran's largest refiner has stopped buying oil because of fears of being targeted with US sanctions. Today, Bloomberg reports that China's leadership has already order its giant state owned oil companies to halt all purchase of Iranian oil.

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