Western Moves to Isolate Russia Spurs China-Russia Energy Deal

President Vladimir V. Putin of Russia, right, and President Xi Jinping of China on Wednesday in Shanghai, where they signed a deal to send gas through a pipeline from Siberia to China. Credit Pool photo by Mark Ralston

BEIJING — China and Russia agreed to a major 30-year natural gas deal on Wednesday that would send gas from Siberia by pipeline to China, according to the China National Petroleum Corporation.

The announcement caps a decade-long negotiation and helps bring Russia and China closer than they have been in many years. The contract was driven to a conclusion by the presence of President Xi Jinping of China and President Vladimir V. Putin of Russia in Shanghai for the last two days.

The notice posted on China National Petroleum’s website said that beginning in 2018, Russia would supply 38 billion cubic meters of natural gas each year to China. China will build the pipeline within its own borders, while Russia will be responsible for the development of the fields and pipeline construction in its territory, the notice said.

The notice said the Irkutsk Kovyktinskoye and Chayandinskoye gas fields in Russia would primarily supply the gas.

The agreement signed by the presidents of China and Russia on Wednesday, which will provide Russian natural gas to China for the first time, also carries major economic and geopolitical implications: 

  • The pact will bolster President Vladimir V. Putin’s “Eurasian Economic Union” by helping to draw Russia and China closer, forming a more powerful economic counterweight to the United States and Europe. This comes at a time when the Obama administration is trying to isolate Russia economically over the crisis in Ukraine and as American tensions with China are rising over cyberspying and China’s territorial disputes with its neighbors.
  • Russia secures a contract, worth an estimated $400 billion over 30 years, that is the biggest in the history of its natural gas industry and provides Mr. Putin with an important new market for natural gas just when the European Union, its most important Western customer, is seeking to diminish its reliance on Russian gas.
  • China, the world’s leading consumer of energy, secures an important source of clean fuel at an advantageous price, decreasing the country’s reliance on imported coal and oil.

The deal is expected to be worth about $400 billion, said James Henderson, a senior analyst at the Oxford Institute for Energy Studies.

The document was signed in the presence of Mr. Putin and Mr. Xi, the Russian news agency Itar-Tass reported.

Mr. Putin told reporters after the signing ceremony that the price of the gas for China was based on the market price of oil, just as it was for European countries.

“The gas price formula as in our other contracts is pegged to the market price of oil and oil products,” Itar-Tass quoted Mr. Putin as saying.

The deal is the largest ever for the Russian natural gas industry, he said.

Russia will invest $55 billion in infrastructure for transporting the gas to China, said Alexei B. Miller, the chief executive officer of Gazprom.

Mr. Putin has been eager to diversify Russia’s gas sales to Asia and away from stagnant European markets. At the same time, he is eager to demonstrate that Russia, in the face of sanctions over the annexation of Crimea, is not dependent on the West.

And Mr. Xi, who has met Mr. Putin seven times since assuming power, was willing to help the Russian leader, said Shi Yinhong, a professor of international relations at Renmin University in Beijing.

Expectations that the deal would be sealed when Mr. Xi and Mr. Putin met on Tuesday were dashed when negotiators from China National Petroleum and Gazprom failed to reach an agreement.

Political considerations, including Mr. Putin’s coming visit to Europe in early June — when he will meet with President Obama and the German chancellor, Angela Merkel — were probably a vital impetus to getting the contract over the finish line, energy experts said.

—————————–for more information, see this background story:

North Sea rigs from a Canadian oil company that was purchased by China. Credit Nexen, via Reuters

 Whether by diplomacy, investment or in extreme cases, force, China is going to great lengths to satisfy its growing hunger for energy to fuel its expanding car fleet and electrify its swelling cities.

The Chinese government showed that desire on Wednesday when it reached a 30-year natural gas deal with Russia, even as China was locked in a tense standoff with Vietnam over a Chinese oil rig drilling in the contested South China Sea.

The two events involve different political dynamics. The agreement with Russia reflects closer economic ties between the two nations, while the other underscores the growing tension of two on-again, off-again Cold War allies.

——————————-

China and Russia Reach 30-Year Gas Deal — New York Times, MAY 21, 2014

But both developments demonstrate China’s expansive approach to energy, a political and economic strategy with significant implications for the rest of the world. As its economy has rapidly expanded over the last decade, China’s energy efforts have come to dominate the global markets. Its mushrooming consumption helped prompt the spike in global oil prices in the mid-2000s.

President Vladimir Putin of Russia and President Xi Jinping of China reached a 30-year deal for natural gas. Credit Pool photo by Mark Ralston

 China’s demand has also provided life support to coal producers suffering from declining use in the United States and other industrialized countries. Among the fastest-growing importers of natural gas, China has had to cement its ties to Russia to diversify its supplies, as well as to invest in exploration in the United States and liquefied natural gas terminals in Australia. China now has operations, investments or projects across the globe in Africa, the Middle East, South America and North America.

“The dynamic growth of China’s economy and energy growth is reshaping global energy markets, and both the economic and strategic implications are still being developed,” said Mark J. Finley, BP’s general manager for global energy markets and United States economics.

The shift has been swift. China used only half as much energy as the United States in 2000. Nine years later, it surpassed the United States as the world’s biggest energy user and last year it leapfrogged the United States as the No. 1 oil importer.

China now burns as much coal as the rest of the world combined. The country’s emissions of greenhouse gases, linked by scientists to global warming, surged past the United States’ emissions a decade ago and have risen ever higher since then.

China has little choice but to look beyond its borders for its energy needs. While it consumed 10.1 million barrels of oil a day last year — one-ninth of the world’s total — the country produced only 4.2 million barrels a day, according to a recent OPEC report. China has had mixed results drilling offshore, and it has been slow to develop what many energy experts believe to be vast shale gas resources on land, though Chinese energy executives express optimism.

“The China market feels that the revolution in shale gas will be coming very soon,” Zhang Mi, chairman and president of Honghua Group, an exporter of drilling rigs, said in an interview while at a Houston energy technology conference this month. He added that 100 shale gas land rigs would be put in operation by the end of the year.

Most energy experts think it will take another five to 10 years, though, before substantial amounts of gas can be produced — and even then the quantities may be small compared to China’s enormous needs. The two main shale gas areas are in the west, far from major energy users in the east, and pipelines are few.

More important, shale gas in China mainly lies significantly deeper underground than in the United States and is in poorly understood, geologically complex formations. The domestic oil industry is already struggling with safety and environmental concerns, and faces a challenge in drilling extremely deep wells in western Chinese terrain with pockets of compressed natural gas and toxic gases.

Leaders announcing a Chinese pact with Nigeria, a major oil supplier. Credit Pius Utomi Ekpei/Agence France-Presse — Getty Images

China’s hunt for natural gas reserves at home has taken it into some of the poorest, most remote mountain valleys of western China, where terraced fields of mustard greens and corn cascade down hillsides from mud-brick farmhouses. While some of the country’s energy giants, like Sinopec, are using modern drilling rigs, smaller Chinese companies are also trying to jump into the industry, although many have minimal experience or technical expertise.

China’s reliance on imports poses the same kind of foreign policy challenges that the United States has faced in recent decades. That is, the country must look to unstable areas of the world to meet its needs.

China imports much of its oil from the Persian Gulf region and through the Strait of Hormuz, where security is dependent on the United States Navy. China relies on roughly a half-million barrels a day from Iran.

But American sanctions on Iran have made that country a less reliable source of oil. At the same time, China has been receiving fewer crude shipments from Libya, Sudan and South Sudan. The Energy Department recently reported that China has nimbly replaced those declining sources with imports from Oman, the United Arab Emirates, Angola, Venezuela, Russia and Iraq.

An exploratory oil rig in Ecuador. China prefers deals with socialist nations like Ecuador that allow it to avoid the United States. Credit Guillermo Granja/Reuters

 

China’s relations with energy-rich countries differs widely. The situation in Vietnam seems extreme, with ships from both countries ramming each other, and the Chinese naval forces using water cannons against the Vietnamese. China’s moves to exert claims to contested Asian waters have drawn protests from its neighbors as well as from the Obama administration.

But in Iraq, where China is the biggest oil customer and Chinese oil companies are major investors in some of the biggest oil fields, the Chinese have been scrupulous about staying out of Iraq’s strained sectarian affairs. And they do not seem eager to challenge the United States’ influence in the region.

China has also become a major player in an area traditionally dominated by the United States, Latin America. But China is largely forging ties with oil-financed governments that promote a socialist ideology and seek to distance themselves from the United States, namely Ecuador and Venezuela.

In Ecuador, China has become effectively the government’s banker, providing roughly 60 percent of Ecuadorean borrowing needs in return for oil shipments. Chinese companies sell the Ecuadorean oil around the world, including to the United States. Venezuela’s state-owned oil company is repaying China for $40 billion in loans procured over the last six years with a large share of its 600,000 barrels a day in oil shipments.

An engineer at a Chinese coal field in Iraq

Africa has proved a more difficult place to invest, showing the limits of Chinese influence. Chad last year indefinitely suspended the activities of the state-owned China National Petroleum because of oil spills south of the capital, N’Djamena. Chadian officials claimed that the Chinese forced local workers to clean up the mess without adequate protection.

A subsidiary of another Chinese oil company, Sinopec, was forced to pay Gabon $400 million in January to settle what the government said was a breach of contract at an onshore oil field. Premier Li Keqiang this month highlighted China’s enduring interest in Africa by visiting four countries, including oil-rich Angola and Nigeria.

The new gas deal with Moscow should strengthen Russia and China, both economically and politically. It will help China ease some of its dependence on insecure transit routes and unstable countries. It will also guarantee an energy market for Russia if Europe seeks to replace Russian energy with imports from other countries.

Russia could supply 38 billion cubic meters of natural gas annually — or more than 15 percent of current demand — to China beginning in 2018. Perhaps most important, the deal should enable China to replace some of its dependence on coal for electricity generation with natural gas.

“The Chinese public will appreciate being able to industrialize without billows of toxic smog,” said Jim Krane, an energy expert at Rice University. “And the world will appreciate the reduced carbon emissions if cleaner gas can thwart some of the coal consumption in China’s power grid.”

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