Many expected China National Petroleum Corporation (CNPC) to sign its long-awaited deal with Russia’s Gazprom this week to construct two pipelines which would transport just under 68 billion cubic meters of natural gas per year from Siberia to China. The timing was supposed to coincide with President Hu Jintao’s visit to Moscow; but alas, it was not meant to be.
The negotiations are hung up on pricing. In a nutshell, Gazprom wants CNPC to pay European gas prices. CNPC does not. Differences of even a fraction of a percent can make a huge difference because of the scale of the enterprise – the project may provide up to 2% of Russia’s GDP.
Recent history might suggest the odds are loaded against CNPC. As a general rule, it’s best to avoid wading into the Russian energy market unless you are either preternaturally intelligent or just plain lucky.
This rule applies on both the macro and micro levels. Since Putin assumed the presidency over a decade ago, the country’s leaders have come to dominate the European energy market by divide and rule – strategically picking off individual EU counties with bilateral deals.
On the corporate level, the examples of Western oil giants burned by the subtle and dynamic power structures of Russia’s oil oligarchs are too many to mention. BP’s disastrous recent run-in with its ostensible partner, Mikhail Fridman, is merely the latest case in point.
Yet all this legerdemain is successful only because the essential dynamics of the European energy market: Russia wants to sell gas, and Europe needs to buy it. The imbalance always tilts the hand in Russia’s favor – the country can and has turned off the taps to underscore that it supplies 25% of the EU’s natural gas.
Europe’s hedge against Russia is Nabucco, a pipeline project conceived in 2006 that would ship natural gas to the EU from Central Asia, bypassing Russia. But it’s something of a pipe dream – even if it were to jump the political hoops necessary for creation, EU officials privately concede that it is unlikely to threaten Russia’s dominance.
By contrast, China has a much better hedge against Russia: Australia. Thanks in part to Australia’s ample reserves of gas – which can be imported to China as liquefied natural gas – the Russian pipeline is more for convenience and security than necessity. That’s why according to analysts familiar with the deal, China seems to have the upper hand in negotiations.
We’ll have to wait to see the terms of the deal to evaluate who bested whom. Yet I suspect that if there’s anyone that can out-do Gazprom, a state-backed energy giant from a country with weak rule of law, rampant corruption and powerful business figures with government connections, it’s China National Petroleum Corporation.