This was one of the biggest energy deal ever struck back in 2014, and “the largest contract in the history of the gas sector of the former USSR,” as stated by President Putin. Today the pipeline connecting the gas-starving northern provinces of China to some of Russia’s largest gas reserves has reached 75.5 percent completion.
This pipeline will reinforce the two neighbours’ political and economical rapprochement, reduce Russia’s dependence on the EU market, and provide China with cheap gas to meet soaring domestic demand.
Russia’s emancipation from the EU market
Since EU decision-making bodies stated the necessity for the Union to diversify its suppliers and thus decrease its reliance on Russian pipeline gas, Gazprom has turned to the growing Asian market. The exact price China and Russia agreed on has not been disclosed, but analysts agree that the price China will pay is somewhere between $350 and $390 per thousand cubic meters (tcm), roughly what Gazprom’s EU customers pay.
China’s industrialisation coupled with the government’s determination to fulfil its international commitments has already made the Asian dragon the world’s third largest market for gas after the US and Russia.
According to the Chinese state-owned oil firm CNPC, China’s gas consumption will reach 520 billion cubic meters by 2030 with domestic production amounting to 340 bcm. China will need to import the remaining 180 bcm. It’s no wonder that Gazprom has put the completion of the Power of Siberia pipeline at the top of its agenda.
Russia, which sits on the world’s largest gas reserves, and China, which is bound to become the world’s largest gas consumer between 2040 and 2050, are discussing a second gas pipeline project, linking China to the West-Siberian gas fields.
Meeting China’s soaring demand
The $400 billion gas deal will provide an annual supply of 38 billion cubic meters (bcm) to the northern provinces of China for 30 years starting next year. The Kovykta and Chayanda gas fields are estimated to hold over 3 trillion cubic meters of natural gas, enough to supply Beijing much beyond the duration of this initial contract.
The nearing completion of the Power of Siberia pipeline represents a godsend for the Chinese government which has been struggling to cope with its growing domestic gas demand. Several factors aggravated the situation.
- In its fight against air pollution, the Chinese government has implemented policies to switch rural and urban heating from coal to gas. In many regions, the conversion from coal to gas reached its completion deadline in December 2017. However, gas storage infrastructures and pipelines were not built on time to ensure gas would be supplied to these regions during winter. Currently, China’s gas storage capacity equals to 3.3 percent of its total consumption. In comparison, the EU and the US have a storage capacity of 20 to 25 percent of their national demand.
- In winter 2017, abnormally cold weather severely hit the Northern and Eastern regions of the country, which are home to most industries and have the highest population density. China’s main steel industry region, Hebei province, declared an orange level – meaning a 10 to 20 percent gas deficit. To meet the soaring demand for gas in the North, Beijing had to make concessions on its ambitious clean energy goals. As gas demand soared, so did prices, and Chinese authorities had to put restrictions on gas consumption for both industries and households, and relent on the ban on coal for heating.
- Supplies from Central Asia significantly dropped, and none of the Central Asian suppliers accepted to give reasons. Until 2017, Turkmenistan had been China’s main gas supplier but Ashgabat appeared much less reliable at a critical time for China. Between 2016 and 2017, gas supplies from Turkmenistan dropped by 14 percent, and last December, daily supplies were between 20 and 30 million cubic meters short of the volumes Turkmengas had pledged under its annual contract with China. Other Central Asian gas producers also pumping in the Central Asia Pipeline between Turkmenistan and China, left Chinese short of gas. Monthly supplies from Uzbekistan and Kazakhstan fell by 42 and 24 percent respectively.
To compensate for the drop in Central Asian supplies, China increased its LNG imports by 46 percent from a year earlier. During China’s winter gas shortage, shipments from Qatar rose to their highest in the past 4 years, and US supplies amounted to 407,325 metric tons compared to nothing a year earlier.
A new Cold War front
Despite not currently possessing sufficient LNG export capacity to significantly develop exports to Asia, Cheniere, the US leading LNG exporter, entered the competition for the Chinese gas market, and struck its first major long-term deal with CNPC in February 2018. The Sale and Purchase Agreement provides for a CNPC annual purchase of 1.2 million tons of US LNG for the next 25 years. With this first agreement, the US market share remains small, given that China imported 68.6 million tons of LNG in 2017, but Washington reinforces its readiness to win the gas war against Russia. The two superpowers are now battling on both the European and the Chinese fronts.
On the European front, Russia is ready to offer the cheapest gas on the market to keep its monopoly over the EU market, which to this day remains its first customer; whilst the US are trying to increase their market share, starting with the strongest anti-Russian member states – Poland and the Baltic states.
On the Chinese front, Russia has long been lured by the Asian dragon’s growing demand for energy and now clean energy, to offset its potential losses in the EU market – Poland for instance declared it would not extend its contract with Russia which ends in 2019. In the past decade, Russia has been multiplying energy deals with its largest neighbour, and as the latter is set to become one of the world’s major energy players, Russia could have a lot more to offer in the pipeline. On top of offering the world’s largest clean energy reserves, Russia shows strong support to China – and vice-versa – at the UN Security Council and both neighbours consistently veto the Western members’ resolutions.
Sensing they could lose the world’s fastest growing market, the US decided to step on the gas, and entered the Chinese LNG imports market at a crucial time, before the much awaited Russian pipeline has been able to solve China’s severe gas shortage.
As Russia is ready to roll out the red carpet to the Chinese government, the US strive to pull the rug out from under their Cold War foe’s feet. But the power of Siberia will reach China very soon. If the pipeline construction keeps following schedule, Gazprom should start supplying China at the beginning of 2019. The US has less than a year to advance their position, and convince China to increase imports from a country that recently raised import duties on Chinese goods and whose president has repeatedly accused China of using unfair trade practices to undercut American manufacturers.
Diane Pallardy studied an MA in Politics and International Relations at the University of Kent, and MA in World Politics and Fossil Energy at the Higher School of Economics, in Moscow.