Beijing pursues closer energy ties with Moscow despite political risk
China’s president Xi Jinping recently said there is room for a “closer energy partnership” with Russia, a major political ally and energy supplier, but the ongoing war in Ukraine has put Beijing in a bind. China is now having to navigate the new geopolitics of energy trade, with officials and industry players weighing up the risks and rewards of the increasingly complex relations after Moscow’s invasion.
Energy cooperation is an important cornerstone of practical cooperation between China and Russia, and it is also a positive force in maintaining global energy security, Xi said in a congratulatory letter sent to the fourth China-Russia Energy Business Forum held at the end of November.
“China is willing to work with Russia to forge a closer energy partnership, promote clean and green energy development, and jointly maintain international energy security and the stability of industry supply chains,” Xi said, according to Chinese state media reports.
Xi added that the neighbouring countries have strengthened communication and cooperation and pushed forward major projects in the face of external challenges, and this reflects the strong resilience of their energy cooperation and the broad prospects of a comprehensive strategic partnership between the two countries.
Russian president Vladimir Putin also sent a message to the forum participants, saying that despite the complicated international situation, the comprehensive partnership and strategic interactions between Russia and China continue to develop. “The energy industry remains one of the key and most rapidly evolving areas of our economic cooperation,” Putin said, according to the TASS news agency.
Geopolitical disorder
Russia-Chinese trade turnover in the energy sector this year has grown by 64% year-on-year, with physical deliveries increasing by around 10%, Russian Deputy Prime Minister Alexander Novak said during the forum. But shadowing this relationship between the world’s largest energy consumer and the massive oil and gas exporter on its doorstep is the war in Ukraine.
Beijing has shied away from taking sides in the conflict but has also not condemned Russia. Chinese anxiety about global oil and gas supply has grown amid new dynamics such as Europe’s ban on crude oil imports on Russia that came into effect on December 5, which has rerouted Russian crude from Europe to the Asia-Pacific region.
The price cap, which would be enforced through western shipping insurance contracts, is meant to allow Russian oil to flow globally while capping oil revenues for Russia. Such moves are increasingly politicising energy trade flows, according to Chinese officials.
“Energy supply is in a historical disorder,” CNPC assistant president Jia Yong told the China International Oil and Gas Trade Congress held in Shanghai recently by the Chinese Ministry of Commerce. The US and Europe advocate free market mechanisms but they have introduced a price cap, CNPC Economics and Technology Research Institute (ETRI) vice president Lu Ruquan said at the event.
China has dismissed the idea of the cap and is not expected to adhere to it when purchasing Russian crude. Instead Chinese buyers will rely on Russian and Chinese ships and likely use sovereign or private insurance companies based in Russia or China. New insurance companies are being created in both countries as well as India, PetroChina’s crude oil department manager Sun Jinhua told the conference.
Possible opportunities
The restructuring of energy flows prompted by the war in Ukraine has benefitted China, which has been buying Russian crude at discounted prices. The re-routing of Russian oil and gas flows away from Europe is also accelerating the internationalisation of the yuan, which is a longstanding goal of China’s. Beijing and Moscow agreed in September to settle payments for Russian gas supplies to China in rubles and yuan, in an effort to insulate themselves from Western pressure.
China is also ramping up its imports of Russian pipeline gas, which are largely seen as more competitive than imported LNG. Greater inflows have helped China cope with surging LNG prices. The value of Russian piped imports in the first 10 months this year reached $3.1bn, or almost triple that of the same period last year, according to customs data.
Russia is on track to export 17.4bn m³ to China via the Power of Siberia (PoS 1) pipeline this year, up from 10.39bn m³ in 2021. Supplies are scheduled to ramp up to 22bn m³ in 2023 and the full contractual volume of 38 bn m³/yr by 2025. In February CNPC and Gazprom signed a 30-year contract for 10 bn m³/yr from Sakhalin Island via a new pipeline known as the Far Eastern Route or PoS 3, which will likely be in operation before the end of this decade.
“Pipeline gas has better stability and will still dominate in the future,” said CNPC’s Lu, who estimated piped gas will make up 52% of China’s gas imports by 2030 with LNG making up the remainder.
The two countries are preparing to sign an intergovernmental agreement on PoS 3, which CNPC chairman Dai Houliang singled out at the Russia-China Energy Business Forum as one of several bilateral major energy projects that needs to be accelerated.
Moscow is also hoping to seal a larger PoS 2 deal that could see up to 50bn m³/yr of gas flow to China, with the probable pipeline route transiting Mongolia.
The 2,600 km-long PoS 2 pipeline would send gas from the huge Yamal peninsula reserves in western Siberia – previously the main source of gas supply to Europe – to China, and have capacity of 50bn m³/yr, which is slightly less than the Nord Stream 1 pipeline that links Russia to Germany under the Baltic Sea.
But China’s recent decision to expand a cross-country pipeline network that links it to Central Asia may complicate negotiations for the PoS 2 megadeal. PipeChina, the country’s state-owned pipeline and LNG import terminal operator, confirmed recently that construction had started on a fourth trunk of the West-East pipeline (WEP) system that is the backbone of China’s gas supply infrastructure.
The segment under construction will run 1,745 km from the Xinjiang regional capital of Urumqi to a terminal in Zhongwei county in hinterland China’s Ningxia region, where the three existing WEP trunks converge.
The fourth WEP (WEP4) will eventually be extended from Zhongwei to the financial hub of Shanghai, covering a total distance of 3,340 km once all segments are completed.
The WEP system is designed to mainly transport gas imported from Central Asia to energy-hungry industrialised provinces on China’s eastern and southern coasts, with 750bn m³ pumped since WEP1 entered operations in 2004. It transported more than 100bn m³ alone last year for the first time.
The western end of the WEP trunks link up on the China-Kyrgyzstan border with the Central Asia-China pipeline (CACP), a separate network of three cross-border gas pipelines that transit Turkmenistan, Uzbekistan, Kazakhstan and Kyrgyzstan. The first two pipelines – known as lines A and B – each have a capacity of 15bn m³/yr while Line C can transport 25bn m³/yr, meaning a combined capacity of 55bn m³/yr.
Decision on Line D
The start of construction of WEP4 suggests China is keeping open the option of importing more gas from Central Asia amid talks with Russia on the PoS 2 megadeal. China has been progressing development of a fourth CACP trunk – Line D with capacity of up to 30bn m³/yr – that would presumably feed gas into WEP4, but progress had stalled since 2017.
Work on WEP4 therefore suggests China sees Line D moving forward – albeit years later than its intended start-up of 2016, then pushed back to 2020 – and may signal Beijing is confident of securing more Central Asian gas to supply its clean energy demand going forward. A new gas field that CNPC brought online this summer at its Amu Darya gas project in Turkmenistan could supply the additional gas to feed Line D.
Demonstrating visible progress on WEP4 and by extension Line D potentially gives Beijing bargaining power when negotiating with the Kremlin for more gas via the PoS 2 pipeline.
CNPC ETRI has forecast Chinese annual gas demand to reach 540bn m³ by 2030, so there is scope for Beijing to sign up for two new pipeline import contracts instead of just one.
This could enable China to become a swing buyer of pipeline gas between Central Asia and Russia, similar to Moscow’s previous ambition of being a swing supplier capable of sending the same gas east to China or west to Europe depending on who was willing to pay the most.