Russia Fails to Increase Gas Exports to China

Wednesday, 13 June 2012

Background 

In early June, President Putin paid a state visit to Beijing. Discussions were largely based on energy issues, but few tangible outcomes were achieved. An agreement between China and Russia to develop Siberian gas fields remains stalled. Ostensibly, price factors have proved a stumbling block. More likely, however, anxiety among policymakers in Moscow and Beijing, fearing over-reliance and ultimately dominance, has been a deciding factor.     

Comment

Last week, Russian President, Vladimir Putin, concluded his first visit to China since his re-election as President. The Beijing visit coincided with Shanghai Co-operation Organisation (SCO) meetings and took place a week after the 8th China-Russia energy negotiation. 

Accordingly, energy, and particularly gas, was high on the agenda during the discussions. Russia is eager to capitalise on China’s seemingly insatiable demand for energy. Beijing wishes to diversify its energy portfolio and, with Siberian gas fields are closer and more secure than Middle Eastern and North African markets. Reflecting the importance of the burgeoning strategic relationship, Putin’s delegation included six cabinet members and key captains of industry, including representatives from energy giants Gazprom and Rosneft. 

Analysts contend that the SCO provides a way for Moscow to amplify its status in the Asia Pacific region. Consistent with this, Putin has used the latest forum as a road show to bolster the credentials of Russia’s future energy expansion. Moscow is likely to be influenced by a number of developments currently taking place within Europe. The current recession gripping the continent shows no sign of resolution, a situation highlighted by Madrid’s request for IMF support at the weekend. European economic performance is closely linked to demand for Russian gas; given current forecasts, demand is unlikely to recover in the short-term. Equally, the rise of ‘unconventional gas’, such as shale, has provided Europe with increased energy independence. Moreover, the future political situation in the Ukraine – a vital European transit point – remains murky at best. The potential for Kiev to stop European supplies remains a very real possibility. 

Recently, China has placed an increased emphasis on natural gas. Beijing is probably influenced by its lower emission levels compared to other fossil fuels. Increasing demand for natural gas is also consistent with China’s broader energy strategy of diversifying sources of energy and export partners. Arguably, energy provides further impetus for developing wider relations by allowing synergies, as demonstrated in Central Asian states with Caspian hydrocarbons. Therefore, the opportunities and benefits of Russian gas are clear. Proximity dictates that Russian sourced gas is cheaper than Middle Eastern imports, with pipelines also providing greater security for LNG, which must transit various existing and emerging flashpoints. 

Significant issues remain, however. During Putin’s visit more than 15 diplomatic and business agreements were ratified and both parties agreed to expand trade and strategic relations, but negotiations on an agreement to exploit Russia’s eastern gas fields remained stalled. Typically, China has proven itself an astute gas customer, sourcing supplies from central Asia, Russia’s traditional sphere of influence. This, combined with gas sourced from Australia and the Middle East, has allowed Beijing greater leverage in negotiations, eroding Moscow’s usual ability to dictate price. Moreover, China’s tough position is likely to be influenced by Russia’s energy policy. As demonstrated in Europe, Russian gas supplies may ebb and flow with diplomatic relations, this will feature prominently in the minds of policy makers in all future Russian gas deals. 

It is likely that Moscow and Beijing’s negotiations will continue, although a resolution is unlikely in the near future. Reliance and potential dominance remain the core issues, with neither Russia, nor China wishing to tightly enmesh their strategic affairs with the other. 

Liam McHugh

Research Manager

Northern Australia & Energy Security Research Programmes

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