China, Russia In Uneasy Energy Embrace – Analysis


By Michael Lelyveld

As sanction threats loom over its export plans, Russia is casting itself as a leading defender of China’s energy security.

At a bilateral energy meeting in Beijing last month, Igor Sechin, the head of Russia’s state-owned Rosneft oil giant, said his company expects to supply China with over 50 million metric tons (366.5 million barrels) of crude oil in 2018, up from nearly 40 million tons last year.

Rosneft “has a ‘leading role’ to play in ensuring China’s energy security,” said Sechin, a former deputy prime minister and close confidant of President Vladimir Putin, according to the website.

In his remarks at the first Russian-Chinese Energy Business Forum, Sechin suggested that U.S. trade frictions with China are pushing Moscow and Beijing closer together to pursue mutual benefits, particularly with petroleum exports from East Siberia and the Russian Far East.

“Certain aspects of the current political conditions in the world, increasing protectionism and [the] threat of trade wars in the world economy serve as additional incentives to cooperate more closely and make decisions faster,” Sechin said.

Without directly naming the United States, Sechin made clear that Russia sees pressure from Washington as a driving force that may promote its economic development in relations with China.

“In many ways, Russia ties prospects for increasing economic growth to advancing development of eastern territories and development of natural resources there,” said Sechin.

“China, in turn, is interested in ensuring its energy security and reliable supply channels,” he said, according to the TASS news agency.

China’s Vice Premier Han Zheng generally agreed with the assessment while applying the security issue more broadly.

“I would like to emphasize that the strengthening of the Russian-Chinese energy cooperation is very important for jointly ensuring energy security and forming the open global economy amid the rise in unilateralism and trade protectionism,” Han said, as quoted by Russia’s Sputnik news.

The broad theme of China’s energy security captured most of the forum’s focus in the absence of major deal announcements beyond Rosneft’s pledge to supply 2.4 million metric tons of additional oil to China National Chemical Corp. (ChemChina) over the next year.

Putin has also played up expectations of new openings for Russia in China as a result of U.S. tariffs.

“For us this creates certain opportunities,” Putin told an investment conference in Moscow on Nov. 28, the Russia Today website reported.

Putin cited plans to sell soybeans and other products to China, replacing U.S. supplies. Putin spoke before the United States and China declared a truce on additional tariffs on Dec. 1.

Although the Beijing energy forum yielded no new blockbuster deals, Russia has gradually increased its oil exports to China since Rosneft agreed in 2014 to a 25-year supply deal with China National Petroleum Corp. (CNPC), then valued at U.S. $270 billion (1.8 trillion yuan).

Russia has surpassed Saudi Arabia as China’s leading oil supplier for the past two years. In the first 10 months of this year, China’s imports from Russia have averaged 1.39 million barrels per day, Reuters said.

Moscow has also promoted its prospects as a major supplier of natural gas to China as the country struggles to curb emissions from coal with greater consumption of the cleaner-burning fuel.

Russia’s monopoly Gazprom is rushing to complete its 4,000-kilometer (2,485-mile) Power of Siberia pipeline project by the end of 2019 to deliver up to 38 billion cubic meters (1.3 trillion cubic feet) of gas per year to China by 2025.

Last month, Interfax reported that Gazprom is considering an expansion of the pipeline’s capacity to 48 billion cubic meters (bcm).

The company has been trying for years to reach an agreement with China on a western gas route to carry 30 bcm per year through Xinjiang, but so far with little success.

Sanction threats to ties

Despite all the talk about its role in energy security, neither side mentioned the risk of existing and proposed sanctions on Russia and the effects they could have on China’s energy ties.

Last week, the Eurasia Daily Monitor of the Washington- based Jamestown Foundation outlined a series of concerns that have hampered relations.

“Particularly troubling, from the Russian point of view, has been the news that Chinese banks are unwilling to support investments in Russia due to the growing risks for potential investors. Namely, the Central Bank of the Russian Federation has reported ‘problems with Chinese commercial banks stemming from economic sanctions imposed by third parties,'” the Monitor said.

Support for new sanctions on the Russian energy sector appears to be growing following Moscow’s seizure of three Ukrainian vessels and 24 crew members near the Kerch Strait and the Sea of Azov on Nov. 25.

Ukrainian President Petro Poroshenko has renewed calls on European Union and NATO nations to block Russia’s construction of the Nord Stream 2 gas pipeline in response.

Kiev argues that the direct Nord Stream route across the Baltic Sea to Germany is aimed at ending Russia’s gas transit through Ukraine, further isolating the country.

On Nov. 8, U.S. Energy Secretary Rick Perry indicated that the administration of President Donald Trump has been considering sanctions against the U.S. $11 billion (75 billion yuan) project even before the Azov incident, Reuters reported.

“I saw no signals where we would ever get to the point where we can support Nord Stream 2,” Perry said at a press conference in Poland, adding that “sanctions were an option that the president maintained.”

Last week, the U.S. House of Representatives passed separate resolutions condemning Russian aggression in the Sea of Azov and construction of the pipeline. The U.S. Senate passed a resolution denouncing Russia’s “provocative actions” on Nov.  29.

U.S. opposition to Nord Stream 2 is cited as a “statement of policy” in the Countering America’s Adversaries Through Sanctions Act (CAATSA), signed into law last year.

The Nord Stream 2 project would double Russia’s direct gas exports to Europe, adding 55 bcm per year to the existing Nord Stream pipeline route, which opened in 2011.

The CAATSA policy statement opposing Nord Stream 2 cites “detrimental impacts on the European Union’s energy security, gas market development in Central and Eastern Europe, and energy reforms in Ukraine.”

Despite Germany’s support for the project, the European Commission has criticized it on similar grounds. The European Parliament passed a resolution against the pipeline on Dec. 12, calling it “a political project that poses a threat to European energy security.”

At a press briefing last week, Russian Foreign Ministry spokeswoman Maria Zakharova said the resolution was “the result of lobbying,” Interfax reported.

Blocking the pipeline “is an insane thing to do for Europe, which needs energy supplies,” Zakharova said.

On Dec. 4, an unnamed senior official from the U.S. State Department told a meeting of NATO’s North Atlantic Council that “the Kerch incident should be a reminder to all of our European allies on why Nord Stream 2 is such a bad idea,” according to a transcript released in Washington.

On Nov. 30, Russia’s Gazprom monopoly, the primary shareholder for the project, said that 300 kilometers of the pipeline have already been laid, Interfax reported.

The impact on China of the Ukraine conflict and potential new sanctions on Russia has yet to be determined, but the threats could make Beijing more wary of relying on Moscow for its energy security. Russia’s willingness to use energy supplies for political purposes may also give China pause.

“Sure, Sechin and Rosneft need Chinese money, since medium-term financing from Western banks is no longer available,” said Edward Chow, senior associate for energy and national security at the Center for Strategic and International Studies in Washington.

“But there are sanctions risks for the Chinese side, such as Nord Stream 2 or Rosneft’s involvement in Iran,” Chow said.

It is unclear what effect new sanctions against Russia would have on China, but any obstacle to Russian exports in Europe could make Moscow even more motivated to pursue energy deals with China.

If new sanctions target sources of financing for Nord Stream 2 and other projects, China’s banks could become even more cautious about backing Russian deals.

Chinese caution

Since the Rosneft agreement in 2014, Chinese financing for Russian energy development has been relatively rare.

Despite years of Russian pressure to bankroll the Power of Siberia pipeline and other gas projects, China’s banks have largely steered clear of offering loans.

Instead, China’s commitments have focused on Russian projects where it has taken direct equity stakes, such as the Yamal LNG project led by Russian independent Novatek to develop and export liquefied natural gas from the arctic region to China and other markets.

In 2016, the Export-Import Bank of China and China Development Bank agreed to provide 15-year credit lines valued at some U.S. $12 billion (82 billion yuan) for the project after CNPC and the Silk Road Fund acquired 29.9 percent of the project’s shares.

China’s cautious approach to Russian financing may be seen as a measure of how heavily Beijing is relying on Russia for its energy security.

“I have seen mostly hype about Chinese investment in Russian energy, with the one exception of Yamal LNG, which started before the Ukraine crisis and related sanctions,” said Chow.

“Most of these so-called deals are about trade and maybe pre-financing secured by supply. I don’t see a lot of real investment deals, just a lot of the same ideas that have been circulating for decades,” he said.


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