Until recently, inadequate transportation infrastructure, along with rancorous arguments about price and a general atmosphere of mutual suspicion have kept Chinese purchases of Russian energy at relatively low levels. But now, with the historic May 21st agreement, the China National Petroleum Corporation (CNPC), the country’s largest integrated energy company, and Russian energy giant Gazprom, which controls Russia’s export gas pipelines, finally signed a thirty-year, $400 billion deal that will see as much as thirty-eight billion cubic meters (bcm) of Russian gas go to China annually from around 2018 to 2047. Gazprom will send gas pumped from its Kovyktin and Chayandin fields in eastern Siberia to the Beijing-Tianjin-Hebei metropolitan area in the north of China and the Yangtze River Delta in the east. The deliveries, which may take a few years to reach full capacity, will provide China with more than one-fifth of its present-day annual consumption of some one hundred and seventy bcm, although Chinese demand for natural gas is expected to rise above two hundred bcm by then.
The final negotiations took place in Shanghai, on the sidelines of the Conference on Interaction and Confidence Building Measures in Asia, a security forum attended by senior Russian and Chinese leaders, including Russian President Vladimir Putin and Chinese President Xi Jinping. CNPC and Gazprom only completed their negotiations at four in the morning on the last day of Putin’s short stay in the city.
The Russian government, which relies on oil and gas revenue to generate rents to pay key domestic and foreign stakeholders as well as for general public services, has been eager to send more gas and oil to Asia. Despite the West’s reaction to events in Ukraine, Russia continues as a major energy player in Europe, which accounts for seventy percent of its exports. But opportunities for further growth there are constrained by economic and political factors, as Putin acknowledged in a speech shortly after the announcement of the Sino-Russian gas deal at the St. Petersburg International Economic Forum. “We have to admit that energy consumption in Europe is growing slowly due to low economic growth rates, while political and regulatory risks are increasing,” he said. “Given these circumstances, our desire to open up new markets is natural and understandable.”
Of these new markets, Russian officials and energy firms have clearly prioritized potential sales to the faster-growing Asian energy markets, especially in China. Demand for energy in Asia is projected to grow at an annual rate of two and a half percent through 2035, a level that is almost double that of the rest of the world. Obtaining a large share of this rapidly developing regional market would give Moscow considerable funds and geopolitical influence. China is willing to provide loans or make prepayments that provide Russia’s often debt-ridden energy companies with ready cash to start building pipelines and modernize their production at low financial risk.
Many of Russia’s new and untapped hydrocarbon fields are situated in eastern Siberia and the Russian Far East, closer to China than the older fields that now provide energy primarily to consumers in Russia and Europe. Their proximity means that Russian oil and gas can enter Chinese territory directly without having to pass through international waters or third-party countries. China already derives large quantities of oil and gas from its recently built energy pipelines with Central Asia, but Chinese analysts question the stability of these suppliers given the upheavals in other Muslim countries and the vulnerability of Central Asia to adverse developments in Afghanistan.
Although oil trade between Russia and China has been taking place for years, Gazprom had postponed building an expensive state-of-the-art pipeline because Chinese and Russian negotiators were unable to agree on a price formula for the deliveries. In essence, Russian negotiators wanted Beijing to pay the same high price as the European customers, whose long-term contracts link gas to oil prices, as a means of helping Gazprom defray the high costs of developing new gas fields and constructing new pipelines from them to China. Chinese negotiators, on the other hand, sought to buy the gas at the lower prices that Chinese utilities are allowed to charge their domestic consumers, having lost billions of dollars on earlier gas imports because of state price controls.