The Future of Chinese-Russian Energy Relations

Natural Gas Europe had the pleasure of discussing Chinese-Russian energy relations with Dr. Keun-Wook Paik, Associate Fellow, Energy, Environment and Resources Programme, Chatham House & Senior Research Fellow, Oxford Institute for Energy Studies (OIES). 

Natural Gas Europe (NGE): Gazprom recently rescheduled the launch of the Power of Siberia from 2018 to 2020. What is the reason for the delay and secondly, do you think such delays are dangerous for Gazprom as they could begin to ‘close the window’ on gas supply as a result of more LNG and potentially domestic shale coming on stream? 

Keun-Wook Paik (KWP): Yes I saw the report. My interpretation of the rescheduling of the pipeline revolves around the issue of availability of financing. I think this year the financial sanctions against Russia are really threatening Russia itself in particular such companies like Gazprom and Rosneft. The launch of the Power of Siberia pipeline needs a massive investment. Gazprom’s initial estimate of the level of financial support for the project from China was $25 billion. I think the rescheduling of the development scheme of Gazprom means that financing from China is not yet in place. This could be one key reason. The other reason presumably is likely to be the limited access to western financing. Gazprom has to be realistic but I’m not convinced whether the delay of the pipeline development will hurt the  strategy of Russian gas exports to China overall.  As for competing against the LNG: basically, the most important point is that 38 bcm gas export to northern China is not really competing against the LNG. Initially these provinces Heilongjian, Jiling, Liaoning will eventually by 2020 to 2025 obtain 20 bcm supply from eastern Siberia then diversify to two more provinces that can  provide 10-18 bcm. So when we look at Chayandinskoe production schedule it cannot just deliver immediately 25 bcm. Rather it will start with a small scale of production and then 5 -10 bcm and then increasing to 25 bcm will take couple of years to reach this production.  So under that development schedule 1 or 2 years of delay is not going to hurt.  Furthermore, I think that Northern China's access for LNG will be limited in particular with the LNG supply from Australia and Canada where some of the projects are expensive. The only main additional source of supply with the reasonable price would be from America. Chinese NOCs are not very active in taking LNG supply from America  and only few  buyers from private sector are taking steps  in this direction.

NGE: Russia has announced that the second major energy deal which would involve developing the Altai route, carrying gas as from Western Siberia to China. It may be signed this year. According to it, China will be supplied with 30 billion cubic meters of natural gas over 30 years. What are the prospects of this project?

KWP: That one is the most important and interesting thing. President Putin and Alexey Miller continue suggesting and Russia is determining to persuade Altai project right after eastern Siberian route. The reason for the pushing initially of the Altai route as Russia’s highest priority, was that eastern Siberia wasn’t really Russia’s main priority. The source fields of Eastern Siberia such as Chayanda and Kovikta were seen as stranded gas. Russia’s main gas supply source is actually western Siberia and Yamal so Russia was very naturally worried about this hostile stance from Europe trying to reduce dependence on Russian gas (even though I don’t think  European reduction of dependence on Russian gas will be a reality). Hence developing an alternative pipeline route to China for that gas was a priority. Furthermore, Russia has to take a step to make itself a swing supplier between European and Asian market and  the most effective way to be swing supplier position is to go ahead and try and get that pipeline route developed under almost any circumstances (well before the large scale LNG supply to China).

NGE: The China-Russia gas deal was delayed for many years, for instance, you were predicting the agreement in 2011.  What made the deal happen? Do you think economic pressures from the geopolitical outfall from Ukraine forced Russia’s hand and put it in a position to do a less than perfect deal with China?

KWP: I have to say the Ukraine crisis was a triggering point for President Putin to accelerate  the gas agreement.  It seemed that China wasn't  happy to  support Altai gas route, so Vladimir Putin  had to accept the Eastern route with the Power of Siberia first.  Now 38 bcm is agreed but 38 bcm alone isn't really helpful for the whole 60 bcm scale gas export to northern China and  then Vladivostok direction. So, from Russia's point in case the U.S. and EU sanctions strategy will hurt  Vladivostok LNG scheme then Putin  has to find a way to compensate the gas export  volume to Asia.

NGE: Alexei Miller, chief executive of the Russian state-owned gas company Gazprom announced the possibility of Russia supplying “up to 100 billion cubic meters of gas to China.” How realistic is this forecast and Russia’s plan to become a swing supplier between Europe and Asia?

KWP: China has already agreed to take up very significant deliveries with Turkmenistan, as well as the other Central Asian states. Probably, the development of China’s pipeline  system from Central Asia will allow China to import 120 bcm by the 2020s ultimately. This can be substantially delivered from the Central Asian states (by 2020 a total of 85 bcm/y pipeline capacity will be ready) or with a substantial commitment from Russian sources. However, for the Russia to provide a very significant amount of imported gas into China, Russia would have to compromise on pricing and find a means of financing the infrastructure costs as well. The upstream equity care will be a very effective one

NGE: The Russian part of the Arctic is becoming an area of bilateral collaboration as well. This year, Russian Novatek signed a contract with CNPC for the annual delivery of gas from Yamal LNG in the next 20 years. Also, President Putin mentioned that Chinese companies may join in the exploration of Vankor field. At present, China holds a flexible position assessing possibilities in the region. Do you think they can make any money with declining oil prices, impact of US shale oil and the prospect of more liquidity?

KWP: That's a very difficult question but  my personal impression was that taking a major stake in Yamal deliveries may be problematic. Yamal LNG supply has a limited gas shipping season of only six months. There is no year long production cycle. For the time being until this  Arctic shipping route is completely opened and production periods can be lengthened, one has to ask questions about the strategy here, and its contribution will be at most marginal.   

This interview was conducted by Marina Zvonareva, a Natural Gas Europe analyst focused on Russia’s international energy relations