Russia seeks to strengthen energy alliance with China

MOSCOW– The Kremlin intensified efforts to re-orient its energy strategy towards East Asia, as Russia’s plans of energy trade with Europe have been adversely affected by the Ukrainian crisis, as well as the latest conflict with Turkey.

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Natural gas and crude oil export to China have long been a key element of Russia’s East Asian energy strategy. This week, Russia moved to strengthen the energy alliance with China by concluding a series of new agreements.

On December 17, the Russian gas monopoly Gazprom and China National Petroleum Corp (CNPC) signed an agreement on the cross-border section of the Power of Siberia gas pipeline, including the sub-water link across the Amur River. The deal involves the so called “Eastern” gas pipeline route.

Gazprom and CNPC also agreed to continue negotiating the “Western” gas supply route in January 2016, including plans to raise its capacity up to 60 billion cubic meters (bcm)/year.

Gazprom and CNPC agreed to cooperate on gas-powered electricity generation in Eastern and North-Eastern China. By pushing this agreement, Gazprom apparently seeks to ensure a long-term market for its gas in China.

CNPC clinched a tentative deal with Gazprom’s oil subsidiary, Gazpromneft, that envisages possible joint oil projects in Russia, China and third countries.

Energy giants Rosneft and China Petroleum and Chemical Corporation (Sinopec) signed an MOU on possible joint oil and gas projects in Siberia.

In all, both sides signed more than 30 energy, finance and technology cooperation agreements during Russia’s Prime Minister Dmitry Medvedev’s visit to China this week.

Also on December 17, Russia’s largest gas processing and petrochemicals company SIBUR and Sinopec finalized Sinopec’s acquisition of a 10% interest in SIBUR. Sinopec will have the right to nominate a representative for SIBUR’s board as a strategic investor, SIBUR said.

This week’s bilateral gas deals followed key agreements concluded earlier this year and last year. On May 8, 2015, Gazprom and CNPC signed a deal on gas supplies to China via the so called Western route. Gazprom agreed to supply China with 30 bcm of gas annually for 30 years. In May 2014, both sides agreed a $400-billion deal for Russia to supply China with 38 bcm/year from 2018 for 30 years via the Eastern route.

Moscow’s plans to develop the energy alliance with China took quite long to materialize. Back in 2006, Moscow first pledged to export Russian gas to China. But Russia and China struggled to agree on gas prices. Gazprom first offered to supply gas at European price levels, while CNPC insisted on lower prices.

Russia’s top officials had previously expected final agreements on gas prices to be concluded in 2009, and gas supplies to start in 2014-2015. Instead, these final agreements were signed only in 2014-2015.

In contrast with the planned gas pipelines, Russian crude oil supplies to China already became an important element of the bilateral trade. In 2014, Russian oil shipments to China reached 28.5 million tons or nearly 40% up year-on-year.

In 2011, Russia started crude oil supplies to China via the East Siberia Pacific Pipeline (ESPO). According to the agreement concluded in 2009, Russian state-run energy giants Rosneft and Transneft pledged to supply 15 million tons of oil to China for 20 years in exchange for Chinese loans totaling $25 billion.

Russia’s latest efforts to strengthen energy partnership with China happened to coincide with a steep decline in international energy prices that came as a blow to the Russian state coffers. Therefore, Moscow is becoming increasingly interested in China’s energy market, part of a huge and still growing economy.

Sergei Blagov is a Moscow-based independent journalist and researcher. In the past three decades, he has been covering Asian affairs from Moscow, Russia, as well as Hanoi, Vietnam and Vientiane, Laos. He is the author of non-fiction books on Vietnam, and a contributor of a handbook for reporters.

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