Russia has a lot of natural gas to sell and China has need for lots of the fuel. Given the supposedly “close” relationship between the two, a deal shouldn’t be too hard to reach.
At the beginning of September, representatives from Gazprom and China National Petroleum Corporation (CNPC) inked a massive, legally binding natural gas agreement. Under the eyes of presidents Vladimir Putin and Xi Jinping, the two parties agreed “the export volume and starting date, the take-or-pay level, the period of supply buildup” and other issues relating to shipments.
Under previously announced plans, Gazprom intends to supply 38 billion cubic meters (bcm) of natural gas per year to China starting in 2018, eventually rising to 68 bcm. China, the world’s biggest energy user, consumed 147.1 bcm of natural gas in 2012, official data show.
For anyone thinking that this is a further sign of warming ties between Moscow and Beijing – hold that thought. More than a decade has passed since talks began and even today no price has been agreed for the shipments. Until it is, no pipelines will be built.
Gazprom isn’t about to give its gas away. The company, for all the hype and flashy new headquarters towering literally over St. Petersburg, is short of cash. Its best fields are aging and infrastructure is neglected. Potentially lucrative assets in Siberia sit unproductive for lack of equipment. Investment is needed to improve production and a deal with China would generate funds.
Beijing covets that gas but is holding out for a good deal. Officials there realize that Gazprom is desperate to reduce its reliance on Europe, its biggest market, where demand is waning and the European Commission is looking at the company’s pricing practices. They also know that South Korea and Japan, major energy importers and potential clients for Russia, do not offer the kind of market scale that China does.
The latest agreement did have some price movement. Gazprom said any price will not be linked to the Henry Hub, a benchmark for US prices that are among the world’s lowest because of the abundance of natural gas in the country from the shale revolution. This is an index that the Chinese had reportedly wanted their prices to be tied to.
Nevertheless the two sides remain around US$100 apart on the cost of 1,000 cubic meters of natural gas, hardly a small amount.
Contrast this with the dealings between China and Turkmenistan. Russia’s Central Asian neighbor inked a framework cooperation agreement for natural gas with China in 2006, and by early 2010 the first pipeline was up and running. Under a new agreement signed at the beginning of September, Turkmenistan will ship up to 65 bcm of natural gas to China annually by 2020.
This impasse over price between Gazprom and CNPC should cast clearer light on the nature of the Sino-Russian relationship, which has been framed by many jittery Western observers as a new Cold War axis.
Events this year have only given them more facts to misinterpret. First, Xi chose Moscow as his first overseas destination after becoming president. Second, China and Russia held large military exercises in August, the latest of several since 2005. The two also side on diplomatic issues such as Syria, Iran and North Korea.
But a desire to stamp their influence on global affairs does not make them best friends. Pragmatism reins in their respective halls of power.
This political relationship helps both in their broader quests. One of these is to rebalance the global order of power in their favor; for example moves to create an international financial institution to offer an alternative to the IMF and the World Bank.
Business is another crucial area of cooperation. Russia needs markets for not just natural gas but oil and coal and China wants secure energy supply routes out of reach of the US Navy, which their shared border provides. Russia also wants to sell more weapons to China, once the recipient of 40% of its arms exports. That they haven’t made more progress in these areas underscores that theirs is a marriage of convenience in which tangible benefits trump ideological kinship.
Moscow and Beijing may eventually agree to a price for the fuel. China’s energy needs continue to grow; annual natural gas imports are expected to top 85 bcm by 2015, the International Energy Agency forecast in June.
Whenever that does happen, it will be because the numbers are right for both sides and not for some grand political gesture.