20 February 2019
Vladimir Putin and Xi Jinping attend a signing ceremony in Shanghai last week for the long-awaited Sino-Russian gas supply deal. Photo: Reuters
Vladimir Putin and Xi Jinping attend a signing ceremony in Shanghai last week for the long-awaited Sino-Russian gas supply deal. Photo: Reuters

Sino-Russian gas deal positive for energy consumers

The huge China-Russia deal on natural gas, which is being hailed as a milestone in the development of relations between the two countries, is likely in the long run to be positive for East Asia and for energy consumers in general.

While it is true that the threat of Western sanctions, including possibly the curtailment of gas imports by the European Union, provided impetus for sealing the accord now, one should bear in mind that negotiations between China and Russia had been going on for a decade and that the economic rationale for both sides is indisputable.

Russia, one of the world’s largest energy producers, needs to diversify and expand its markets. The 30-year agreement signed last week will expedite energy export not only to China but to other countries in the Asia Pacific as well.

The accord also enables China, the world’s leading consumer of energy, to lessen its dependence on the politically volatile Middle East. Moreover, pipelines carrying natural gas from Russia will reduce China’s dependence on sea lanes kept open by the United States.

An additional plus for China is that gas is a much cleaner form of fuel than the coal-fired power plants on which the country is now primarily reliant.

While the accord ensures China a stable supply of natural gas – in addition to what it is already receiving from other suppliers, in particular Turkmenistan – it also means that Beijing will not need to purchase as much gas on the spot market so that more gas is available for other consumers.

Also, while the Sino-Russian accord lessens Russian dependence on European markets, it in no way decreases the supply of gas available to Europe, since the natural gas to be exported to northeastern China will come from new fields in eastern Siberia—the gas fields of Kovykta and Chayanda—via the projected “Power of Siberia” pipeline.

President Vladimir Putin told reporters before leaving Shanghai, where the agreement was signed, that total proven recoverable resources at these two Russian fields “come to 3 trillion cubic meters of gas” – well in excess of the 38 billion cubic meters per year that Russia has promised to deliver for 30 years – “and in actual fact the resources there are even greater”.

China consumed 170 billion cubic meters of gas in 2013, and the consumption level is expected to reach 420 billion cubic meters by 2020.

In the past, Russia’s pipeline gas exports have been exclusively to Europe but, as Putin himself has acknowledged, the European market isn’t growing and “political and regulatory risks are increasing”. So, Russia is keen to open up new markets in “the dynamically growing Asia Pacific region”.

But even after the flow of natural gas to China begins, probably in 2019, Europe is likely to remain Russia’s largest energy market.

Putin indicated at a press conference before his return to Russia that there are plans for stepped up energy exports to China. The signing of the gas contract, he said, “gives us the chance to start work on our next project with our Chinese partners, namely planning a western supply route from the resource base in western Siberia.”

The contract signed in Shanghai came after many years of haggling over prices, with the Russians asking China to pay prices comparable to those paid by Europeans. Even now, the exact price that China has agreed to pay has not been disclosed because, Gazprom said, it is a “commercial secret”. But the company put the value of the overall contract at US$400 billion.

Putin also refused to be specific on the price China agreed to pay, other than to say that it would be “pegged to the market price for oil and petroleum products” and “in the same way as the formula used for calculating the price for European consumers”.

Before Russia earns a penny from its gas sales, it will have to spend a fortune – estimated at US$55 billion – on infrastructure and create, in Putin’s words, “one of the biggest construction sites in the world over the next four years”. China will have to invest at least US$20 billion on its side of the border.

The threat of Western sanctions has driven Russia into China’s hands and the world is likely to see a tighter Sino-Russian relationship not only economically but politically, diplomatically and even possibly militarily as well. But the relationship is uneven. While in the 1950s the Chinese saw the Russians as being their “older brothers”, today the shoe is on the other foot and it is Moscow that will have to step gingerly where China’s interests are concerned.

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Frank Ching opened The Wall Street Journal’s Bureau in China in 1979. He is now a Hong Kong-based writer on Chinese affairs.

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