Does Russia Need China’s Energy Market?

27.05.2011

Has Russia missed the chance to strike a lucrative partnership with China over energy resources? Do its oil and gas companies still have time to strengthen their foothold in eastern markets? China is the world’s second largest energy consumer after the United States, accounting for over 10% of global primary energy consumption.

A new round of energy talks are soon to be held within the larger framework of Russian-Chinese economic cooperation. Russian Deputy Prime Minister Igor Sechin and his Chinese counterpart, Wang Qishan, will discuss the current conditions of and prospects for cooperation in the energy sector, particularly with regard to oil and gas, which have become a major component of Russian-Chinese bilateral relations.

In October 2009, when Prime Minister Vladimir Putin visited China, a number of agreements were signed in order to boost bilateral cooperation, including a cooperation program between the regions of Eastern Siberia and the Russian Far East and China’s northeastern provinces.

More recently, Rosneft and the China National Petroleum Corporation (CNPC) also signed an agreement on the annual supply of 15 million metric tons (110.25 million bbl) of Russian oil in exchange for a $25 billion loan to Rosneft and Transneft for the construction of a branch pipeline from Skovorodino to Daqing in northeastern China. A related agreement stipulates the supply of some 70 billion cubic meters (2.47 trillion cu f) of Russian natural gas to China annually.

Many people in Russia wonder whether such cooperation is in fact in their own interests, fearing that Russia might soon find itself in the position of a mere commodities supplier. But the question should be rephrased as follows: Has Russia missed the chance to strike a lucrative partnership with China over energy resources? Do its oil and gas companies still have time to strengthen their foothold in eastern markets?

China is the world’s second largest energy consumer after the United States, accounting for over 10% of global primary energy consumption.

While implementing its 11th five-year plan (2006-2010) and drafting a socio-economic development plan through 2020, China came to the conclusion that in order to achieve its goal of “prosperity in moderation” (xiaokang), it needs to increase its energy production accordingly. However, that could be more easily said than done: ever since the 1990s, China has been aware of its dwindling oil supplies, and now insufficient reserves of natural gas and coal may be added to the list.

Meanwhile, China’s demand for energy will keep growing. Its sizable coal reserves notwithstanding, its imports have exceeded exports since 2007. Given the trends of its economic development, China will be hard put to meet its energy requirements in the 21st century.

As for Russia, oil and gas account for over 70% of its exports in terms of value, but nearly all of it is directed westward along existing pipelines from Western Siberia. This irrational distribution of production power in Russia in part underwrites the hypertrophied growth of its European territory at the expense of the starkly underdeveloped east.

The development of large-scale projects designed to deliver Russian oil and gas to Northeast Asia could boost the economic development of Siberia and the Russian Far East while attracting the investment from countries interested in importing Russian energy resources. Russian-Chinese oil and gas projects could be the first step in this direction.

One of the biggest stumbling blocks to Russian-Chinese energy cooperation, however, will be a pricing agreement. It’s no coincidence that this issue has been at the center of ongoing and thus far unsuccessful negotiations between Gazprom and CNPC. Russian companies can demand the same prices for energy distribution as they do for their Western clients, however, as long as China produces more energy than it consumes, it will be reluctant to pay those prices.

In this regard, it should be noted that China has large coal reserves and that its so-called “coal kings” can always increase production to compensate for energy shortages on the domestic market. Furthermore, it has surged ahead in the production of alternative energy, including wind, solar, tidal, geothermal, hydrothermal energy and bioresources, as well as building small hydroelectric plants. It also has long-standing relations with oil suppliers in the Middle East, Russia, Central Asia, and Latin America.

Overall, China has enough energy to maintain the rapid growth of its economy. But it will need more energy to accelerate the growth of its GDP, which means that it will have to import oil, as well as natural gas and coal.

Under these circumstances, if Russia does not pay more attention to the eastward development of its energy exports, it will soon find itself elbowed out of the Chinese energy market by its international competitors.

Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.

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