Power of Siberia Opens Chinese Gas Market

In a December 2nd conference call, the leaders of Russia and China will officially launch a new era in relations between the two countries. The largest gas exporter and the fastest growing large market in the world will be connected by a pipeline system that will link the gas fields of Eastern Siberia with Shanghai; the pipeline network will extend more than 6,000 km. Russian gas exports, of course, will not turn to the East (the European market remains the most important area), but they will acquire a second foothold, and its importance will grow in the long term.

In the five years that have passed since the signing of the 30-year agreement between Gazprom and CNPC for the supply of more than 1 trillion cubic meters of Russian gas to China (the largest gas contract in world history), the Chinese market has grown by 67%, necessitating a two-fold increase in imports. According to the 2019 results, demand for natural gas in China is expected to come very close to, or maybe even exceed 300 billion cubic meters, and imports will reach a new peak of 130 billion cubic meters. Last year, China overtook Japan to become the world's No. 1 gas importer.

At the same time, we cannot say that China's import basket is very diverse. On paper, everything looks beautiful - four pipeline gas suppliers and two dozen LNG producers. But in reality, gas from Turkmenistan, Uzbekistan and Kazakhstan, which together provide 94% of pipeline supplies to China, comes along one corridor to the north-west of the country. The remaining cubic meters come to China from Myanmar, but the gas pipeline, which was built in 2013, has since then worked at no more than a third of its design capacity. Moreover, in the last three years, deliveries have been reduced due to the resource constraints and growing energy needs of the exporting country.

Obviously, with the Russian pipeline gas, which will be consumed in the east of China, providing these provinces with clean energy, the diversity and sustainability of the country’s gas supply will make a big leap forward. Moreover, due to the construction of new infrastructure and expansion of the existing network, this Russian gas will be supplied both to the capital region and to the most industrially developed areas, in the east coast of the country.

Consequences of Cooperation Between Russia and China in the Global Natural Gas Market
Hu Angang
The signing of a cooperation agreement between Chinese and Russia energy companies is, without a doubt, a major breakthrough, and an important emblem of the comprehensive strategic partnership between Russia and China, as well as their cooperation in the new era. As Chinese President Xi Jinping stated at the Second China-Russia Energy Business Forum, China and Russia have a vast amount of territory, and great potential in the area of energy cooperation, writes Hu Angang, Economics professor at Tsinghua University, China.
Expert Opinions

It is assumed that deliveries will increase gradually to the level stipulated in the contract, 38 billion cubic meters per year, over a period of 5 years. But it can be accelerated, given the appropriate market conditions and consumer readiness. In addition, there is a technical possibility of increasing export volumes by 20-30% and China’s representatives are already talking about the prospects for its use (of course, Beijing plans to bargain well first).

The main reason for such a rapid development of gas demand in recent years is not only the dynamic growth of the PRC’s economy, (which, despite all reservations and difficulties, totals about 6% per year, an unattainable level for developed countries), but also a change in the public approach to quality of life. In 2013, Beijing adopted the Blue Skies programme, which set ambitious goals to reduce air pollution. But in reality, its implementation was accelerated only after the provinces in 2016 launched plans to transfer consumers (households and small private entrepreneurs in cities) from coal to clean energy - electricity and natural gas. During 2017-2018, 9 million consumers were transferred, of which more than half preferred natural gas. Of course, it didn’t happen without “excesses on the ground”, and peak winter demands grew faster than expansion of infrastructure capabilities, which in turn led to interruptions in gas supplies. This is one of the main reasons (along with the trade war with the United States and its consequences for economic growth) for some slowdown in gas demand in China in 2019. At the same time, China’s Communist Party and the government are still far from reaching the target share of gas in the energy balance, which was set at 10% in 2020 (in 2018, it overcame the 7 percent barrier).

But in the long-term, the Chinese market appears to be the main locomotive of growth in global gas consumption. Market participants and experts can argue whether it will amount to 500 billion cubic meters in 2030 or account for 600 billion cubic meters. In any case, this means enormous opportunities for external suppliers, since the main difference in estimates is based on different expectations of domestic production growth in China.
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