Russia, China and LNG

Russia’s Siberian oilfield and industrial complexes are natural magnets for Chinese capital.— AFP

The $400 billion Russian-Chinese gas deal symbolises a de facto diplomatic, financial and even military alliance between Moscow and Beijing. A Russian-Chinese “entente” will be a significant milestone in international relations. Its logic lies in American sanctions on Russia and a “pivot to Asia” whose geostrategic objective is the containment of Chinese power in the Pacific Basin. This is the reason President Putin has offered China Russian gas at attractive prices after decades of stalled negotiations. This is also the reason China has not protested the annexation of Crimea, recognised the Russian protectorates in Ablahazi and North Ossetia and used its UN Security Council veto to support the regime of Russia’s vassal in Syria. China knows that it is on a collision course with the United States in its border and maritime conflicts with Japan, South Korea, the Philippines, Malaysia and even Vietnam. Russia, in contrast, supports China in all its territorial disputes in the South China Sea and in the Senkuku Islands.

The Obama White House has abandoned the Kissinger Doctrine, which argued that US relations with either Moscow or Beijing had to be substantially stronger than the bilateral relationship between Russia and China. In fact, President Nixon and Dr Kissinger used Sino-Soviet military clashes on the Ussuri River to persuade the Kremlin to “detente” and persuade Chairman Mao to sign the Shanghai Accord that prodded North Vietnam to sign a peace, agreement with the US. It is no longer possible for the US to play a “Russia card” or a “China card” while Moscow and Beijing have joined to thwart US policy in Syria, Iran and Ukraine. Both Russia and China have decided to challenge the American dominated international political and economic status quo. The US demonised Russia after Vladimir Putin used military force in Chechnya, Georgia and Crimea.

Russia’s Siberian oilfield and industrial complexes are natural magnets for Chinese capital. China’s huge military spending and the People’s Liberation Army’s growing influence on the Politburo means Beijing’s “Russia card” can influence the global balance of power. Japan’s recent shift away from its pacifist Constitution and Western attempts to arm India will only increase the rapprochement between the Kremlin and Beijing. Russia and China’s $400 billion natural gas supply and purchase deal in Shanghai signed during President Putin’s last state visit would simply not have been possible without the new geopolitical realities in Ukraine. China is a natural market for Gazprom to diversify its exports from Europe, where economic growth (and thus natural gas demand) will be so much higher in the next decade. China’s industrial development in turn, is hostage to geopolitical risk in its oil and gas imports in the naval choke points of the Straits of Hormuz, Suez Canal and the Straits of Malacca. Gazprom boasts the world’s largest gas resources and production, making it a natural supplier to China at a time when Europe is desperate to reduce its dependence on Russian gas via Algerian and Qatari LNG imports. If the United States removes its ban on crude oil and LNG exports, Russia will be forced to increase its export dependence on China.

Coal has been the primary source of energy in China’s industrial, northern provinces ever since Chairman Mao is Great Leap Forward a half-century ago but coal has led to China’s horrific pollution crisis and lung cancer epidemic. This is the reason Premier Li Keiang plans to double China natural gas consumption to 400 billion cubic metres by 2020. Turkmenistan, China’s current largest supplier, simply cannot export an extra 200 billion cubic metres per year in the next six years. China needs Russian gas as badly as Russia needs Chinese export markets.

China pays $350 per thousand cubic metre for Turkmenistan’s natural gas. It is entirely possible that the Chinese took advantage of Russian post-Crimea diplomatic isolation, rift with Gazprom’s largest client Germany and threat of Western sanctions to negotiate an even lower price with Putin.

This could be a reason why the exact supply price and pricing formula agreed in Shanghai is a state secret.

China money has often played a strategic role in Russian energy. The China Development Bank and Export Import Bank of China provided Rosneft with a $6 billion loan to buy oilfields once owned by Yukos. Ex-Chinese Premier Wen Jiaabao negotiated a $25 billion oil-backed loan to Rosneft and Transneft, the Kremlin’s state-owned pipeline developer during the post-Lehman Brothers collapse in oil prices and cash crunch in early 2009. Russia is now China’s fourth largest crude oil supplier and a hedge against sanctioned Iran imports. China has also agreed to invest $20 billion in Russian gas infrastructure and development of new fields in East Siberia and the Arctic

The Chinese-Russian deal means lower Asian LNG prices, now $13 per million British thermal unit in the spot market. Japan, Taiwan and South Korea could well buy Russian gas via LNG and pipeline. This is hugely negative for Canada and the Gulf LNG exporters, notably Iran and Qatar.

The writer is a Dubai-based research analyst in energy and GCC economics.