June 2023, Vol. 250, No. 6
Guest Perspective
Beijing Holds All Cards in Russia’s Eastern Energy Pivot
By Tatiana Mitrova, Research Fellow, Center on Global Energy Policy of Columbia University
(P&GJ) — Russia is looking to build on its energy ties with China, a key buyer of its gas. But Beijing’s position of power in the relationship may mean the sanctioned producer is in no rush to complete new projects, especially the much-discussed Power of Siberia 2 pipeline. That seemed to be the message coming out of the high-level meeting between Beijing and Moscow.
The Russia-China relationship has a long and complex history, shaped by the lengthy border between the two countries, the complementarity of their economies and the ambitions of both to be seen as key geopolitical actors. Following periods of friendship and tension in the Soviet era, the post-Soviet decades have seen a more complicated relationship develop based as much on economic reality as political ideology.
The early 2000s saw a period of cooperation and growth in trade between the two countries, accompanied by rhetoric of friendship and partnership from both sides. Energy played a significant role in this, with a rise in coal exports to eastern China being followed by greater railway oil supplies and the completion of the Eastern Siberia-Pacific Ocean oil pipeline in 2011 – all serving as important elements of mutually beneficial trade.
Attempts to find common ground in other sectors were unsuccessful, however. Despite numerous discussions, there were no significant electricity export and talks on pipeline gas supplies to China proved fruitless.
Russian oil companies, while giving access to the Chinese upstream, never managed to access the downstream Chinese market.
Chinese firms, meanwhile, began to face increasing skepticism from their Russian partners, with both state-owned gas company Gazprom and Russian oil producers showing little interest in joint production, while the Chinese side was focused mainly in accessing reserves, obtaining equity shares and building infrastructure to have complete control over Russian hydrocarbon supplies.
Pricing disagreements became more noticeable, as Russia’s top managers struggled to adjust to the Chinese way of negotiating and bargaining. As a result, practically all contracts concluded turned out to be significantly less attractive for the Russian side than cooperation with European partners.
Moreover, while all the exploration and export infrastructure had already been built for Europe, huge investments were required to develop new oil and gas provinces and construct expensive infrastructure for exports to China.
Negotiations on oil supplies were complicated and confusing, with supplies starting only in 2011 and almost immediately leading to a price dispute.
The only success story in this period was in 2013, when China’s state-controlled CNPC acquired a 20% stake in the $27 billion Yamal LNG project, owned mostly by Russian independent Novatek. A year later, a 9.9% stake was put up for sale, which was bought by state-owned investor the Chinese Silk Road Fund.
Annexation of Crimea
Moscow’s annexation of Crimea in 2014 prompted the most significant breakthrough in Russia and China’s energy relationship. The introduction of Western sanctions made it clear to Russia that it needed to accelerate its eastern pivot.
Within a couple of months, a 30-year deal was signed with China that was hailed as the “deal of the century” by Russian President Vladimir Putin. The agreement included the construction of the Power of Siberia gas pipeline with supplies of 38 Bcm annually.
Gazprom did not receive a Chinese loan for construction of the pipeline and was forced to finance the $25 billion project out of its own pocket. However, this meant the Chinese were not involved in the development of deposits, which Gazprom wanted to avoid.
Contract prices are confidential and only known to be linked to a basket of oil products, but calculations based on the volume of exports disclosed by Gazprom and the import cost published by the Chinese Customs Service indicate the price Russia is receiving is far lower than what it agreed with its former European customers. Nevertheless, the deal had significant geopolitical value for Russia and was a visible sign of its strategic partnership with China.
It is notable that no pipeline from Russia to China began to be developed until after Beijing had laid pipes from Central Asia, where the Chinese gained access to the most profitable parts of the oil business; in Russia, China remained mainly a buyer of oil and gas.
When Russian state firm Rosneft put up for sale a large share in the Vankor oil and gas field in Eastern Siberia in 2016, Chinese companies were the first to be offered the opportunity to purchase it. However, the offered price did not suit them, and eventually, Indian investors were brought in.
As a result, no new Russia-China deals were concluded between 2014 and 2021; Moscow only completed already announced projects, and Beijing waited. Russia began pushing another pipeline project, Altai, intended to take gas from Western Siberia and Yamal to China, immediately after signing the contract for Power of Siberia, but the Chinese side were not enthusiastic.
Yamal LNG was completed and began supplying gas in 2017. In 2019, Novatek and its partners made FID on Arctic LNG 2, another liquefaction project – this time worth $21 billion. CNPC and Chinese state peer CNOOC received a 10% stake in Arctic LNG 2.
Power of Siberia was completed in 2019 and has gradually begun to increase deliveries. A total of 15.5 Bcm of gas was delivered to China through the pipeline in 2022, according to Gazprom. The pipeline took five years to build and will take another five years to reach its full capacity of 38 Bcm annually. The Kovykta field, which will supply more gas to the pipeline, became operational at the end of 2022.
In February 2022, during a visit to the Beijing Winter Olympics, Putin held talks and signed an agreement with his Chinese counterpart Xi Jinping on a new eastern route, with deliveries of 10 Bcm of gas annually from Sakhalin to northern China. Just a few days later, Russian invaded Ukraine.
War in Ukraine
The scale of Russian aggression toward its western neighbor clearly came as a surprise to China, and throughout 2022 Beijing behaved extremely cautiously. Despite the massive exit of Western companies from the Russian energy sector and the opportunities to acquire valuable assets at advantageous prices, China remined neutral.
No oil and gas investment agreement was concluded, although China continued to increase its imports of Russian energy resources as European embargoes kicked in, receiving significant price discounts and switching to yuan payments.
As a result, in 2022 Russia became China’s second-largest supplier of crude after Saudi Arabia, delivering 1.7 MMbpd and accounting for 17% of its imports (up from 16% in 2021) and 35% of Russia’s exports (up from 31% in 2021).
Russia was China’s fourth-largest supplier of LNG, delivering 6.5 mtpa and accounting for 10% of China’s imports (up from 6% in 2021) and 20% of Russia’s exports (up from 17% in 2021). Russia was also China’s second-largest supplier of pipeline gas after Turkmenistan, delivering 15.5 Bcm, which accounted for 25% of China’s imports (up from 24% in 2021) and 15% of Russia’s exports (up from 5% in 2021).
China has no reason to rush: Russia has no other options to monetize this gas.
At the end of January 2023, Moscow and Beijing signed an intergovernmental agreement on the delivery of gas to China via the Far Eastern Route, which defines the key parameters of a 10 Bcm annual gas supply contract and envisages the use of the countries’ national currencies for payment.
Russian authorities have repeatedly tried to advance negotiations for a new gas pipeline from Western Siberia, which has since changed its route to transit through Mongolia and been renamed from Altai to Power of Siberia 2, or Union East).
This project, with a capacity of 50 Bcm annually, would be comparable to the Nord Stream pipeline between Russian and Germany and would allow Moscow to partially compensate for the self-provoked loss of the European market.
Gazprom said it completed the feasibility study for the proposed 596-mile (960-km) pipeline, which is intended to deliver up to 50 Bcm annually of gas to China via Mongolia, in January 2022. At the end of February 2022, Gazprom said that Power of Siberia 2 had entered the design phase after its chairman held a meeting with the prime minister of Mongolia. However, Gazprom has not signed a supply agreement with China.
Waiting Game
Xi’s visit to Moscow in mid-March 2023 was expected to be a landmark in the Russia-China relationship. Indeed, the Chinese president framed his visit as “a journey of friendship, cooperation and peace,” but despite numerous contracts and memorandums of understanding, no documents on energy cooperation were signed.
A joint statement said, “the two sides will work together to promote studies and consultations on the new China-Mongolia-Russia natural gas pipeline project.” However, this vague wording may signal a further delay in coming to a final agreement on Power of Siberia 2, given Beijing has avoided making a more specific commitment.
China has no reason to rush: Russia has no other options to monetize this gas, and the longer China holds out, the more favorable will be the terms it is able to achieve (without allowing the Russian economy to collapse, of course). Furthermore, even when the gas pipeline is eventually built, China does not need to use it at capacity all the time: it could be a seasonal swing – a giant gas storage – for the Chinese market.
This would provide high stability to the Chinese energy system but would be extremely disadvantageous for Russia.
China is, therefore, not in a hurry. For the Russian elites, on the one hand, there is a fear of becoming a Chinese satellite, while on the other, there are high hopes for greater economic cooperation and for China to become a locomotive for the restoration of Russian economic and geopolitical influence.
Author: Tatiana Mitrova is a research fellow at the Center on Global Energy Policy of Columbia University.
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