The Ongoing Sino-Russian Energy Wrangle

Chinese Dragon and Russian Bear
There was something unusual about Alexander Medvedev’s visit to Beijing in May: the newly elected Russian president didn’t take his energy minister along. This might easily be explained by claiming that Medvedev just wanted to chat with his Chinese counterparts, but that doesn’t make much sense. Russia and China have been trying to conclude a number of oil and gas pipeline deals, some of which have been pending for years.
For instance, the two countries still struggle over a pricing impasse for construction of the East Siberia-Pacific Ocean (EPOC) oil pipeline, and two new natural gas pipelines that are expected to pump natural gas from eastern and western Siberia to China. The original plan called for Rosneft to complete EPOC’s eastbound section, stretching from Taishet in east Siberia to Skovorodino, before year’s end, but now the company is likely to delay the project by another year, due partly to continuing price negotiations. Rosneft believes that, based on the original price formula agreed on in 2006, it would lose about $40 per ton of crude sold to China. Thus, it’s not surprising that Rosneft wants Medvedev and the Kremlin to resume crude price negotiations with China.
For China, an increase in prices would be more bad news. Its government controls oil product prices as part of its efforts to stem inflation. And that makes it difficult for CNPC, Rosneft’s Chinese counterpart, to accept a sharp price rise.
For his part, Medvedev claims that China and Russia “have basic agreements” on the pipeline projects and that the talks’ final stages are underway. But many uncertainties remain. Gazprom prefers to use the same gas export price formula for China as for its European customers, which is far higher than what CNPC can accept.
Indeed, pricing remains the key issue. Rosneft and Gazprom want contracts that closely follow market prices. CNPC insists that the average Chinese resident’s purchasing power must be factored into the price. Further, it wants the price of Russian gas to be aligned with coal prices in northeastern China, a concept that is not acceptable to the Russians.
In addition to price, there are other concerns about natural gas supplies for China. Russia’s natural gas resources can’t supply both Europe and China. In fact, Siberia’s natural gas output is likely insufficient to supply Russia’s European customers. And even though the Sakhalin-1 project has 485 billion cubic meters (17 Tcf) of proven natural gas reserves, not much of that will go to China because Japan has the lion’s share in the project.

EPOC and the Siberian Gas Lines
In 2006, Russian president (and now prime minister) Vladimir Putin said his country planned to dramatically increase its oil exports to Asia. And that declaration helped give more momentum to the EPOC plan.
That same year, Russia mulled building a 4,700 kilometer crude pipeline from Taishet via Skovorodino to the port of Nakhodka, with annual designed transmission capacity of 584 million barrels. The first phase, from Taishet to Skovorodino, will be able to carry 219 MMbbl, supplying 146 MMbbl to China through a spur line.
In 2006 Gazprom announced plans to export gas from Siberia to China, including plans to construct two highly challenging pipelines and offering 68 Bcm of gas per year. This ambitious plan has aroused suspicions over Russia’s true motivations. Does it want Europe to import Siberian gas before it is snapped up by China, or is Russia hoping to monopolize China’s gas imports?
Russia is likely to justify these plans by attempting to induce European energy insecurity and thus create competition for Siberian gas. At any rate, it is a rather clumsy threat.
Russia’s plan calls for building two pipelines from eastern and western Siberia to western and northeastern China. Prioritized by Putin, the western Altai pipeline, covering 2,800 kilometers, will transmit between 30 Bcm and 38 Bcm of gas to China by 2010.
The two countries originally planned to complete commercial gas talks by the end of 2006, so as to start first supplies via the western route in 2011. In 2006 they signed a protocol that fixed the gas supplies’ terms, volumes, and routes. Gazprom issued a statement that said, “The two sides took the next step toward the coordination of conditions and organization of gas supplies from Russia to China via the western and eastern routes.” However, it stopped short of specifying which Russian fields would supply the needed gas.
The Altai line, crossing many rivers, mountain ranges, and deserts, will be technically challenging. From the geopolitical point of view, China may be reluctant to import such huge volumes of gas from a single country, especially Russia, with whom it has an intricate political and historical relationship. Proof of that reluctance can be seen by looking at China’s recent decision to build a pipeline that will allow it to import gas from Turkmenistan.

China has warned Russia to quickly decide on the gas pipeline’s construction, or else miss the opportunity to lock in Chinese customers before increasing quantities of LNG hit the market over the next decade. CNPC is planning two LNG terminals in northeastern China, which may dampen the region’s demand for Russian gas.
While Russia and China continue to argue about prices for pipeline projects, they are also wrangling over Chinese participation in the Russian upstream. Under Putin, the Kremlin re-asserted control over many major oil projects. And in 2006, Russia passed a law requiring foreign companies interested in seeking upstream access to prove that they are Russian-owned.
The law states that foreign citizens and international organizations cannot legitimately exploit Russia’s resources. Companies wishing to participate in oil and gas auctions must demonstrate that Russian citizens own at least 50 percent of their outstanding shares, thereby giving local players a major role. The new regulations are also intended to give the Russian government a more active role in the sector.
A CNPC official said energy projects in Russia involve numerous uncertainties, due to geopolitical complexity and the ongoing fight between state-owned companies and international oil companies for Russian energy assets.
In short, more Medvedev visits to Beijing will be required before the issues over pipelines, pricing, and upstream access are resolved.

© 2013 Energy Tribune

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