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    China, gas and Russia [NGW Magazine]

Summary

Relations between Russia and China warm up as relations between either of them and the US cool down, making life difficult for long-term projects such as gas infrastructure.

[NGW Magazine Volume 4, Issue 7]

by: Dmitry Shlapentokh

Posted in:

NGW News Alert, Liquified Natural Gas (LNG), Featured Articles, Americas, Asia/Pacific, Europe, Premium, NGW Magazine Articles, Volume 4, Issue 7, Political, Infrastructure, Pipelines, Nord Stream 2, Power of Siberia, Turk/Turkish Stream, EU, China, Russia, Ukraine, United States

China, gas and Russia [NGW Magazine]

Gazprom CEO Alexei Miller has said that the 38bn m³/yr Power of Siberia, the Russian gas line destined to send gas to China, would be built ahead of time. This desire to speed up construction quite likely is due to two reasons:

  1. China and the US could finally reach a deal which would send a considerable amount of American LNG to China, and this could lead to a decline in price.
  2. China could be self-sufficient in the near future and need neither Russian nor US gas.

It goes without saying that gas has played a crucial role in the Russian economy and geopolitics. This was clearly stated by Vladimir Putin from the very beginning of his rule as Russian president. Europe had been clearly a major destination of Russian/Soviet gas since the beginning of the Soviet era. Post-Soviet Russia followed the tradition. And here Russia could take advantage of Soviet-era gas pipelines. European currencies, and later the euro, were welcomed as currency, and payments were on time. The USSR reciprocated and never stopped gas delivery, even during the tensest moments of the Cold War. In addition, Europeans saw no alternative to Soviet gas. The then US president Ronald Reagan attempted to discourage Europeans from relying on Soviet gas, but to no avail. Post-Soviet Russia followed the old Soviet routes. This does not mean that the eastern direction was ignored. By the time of Gorbachev’s rule – he visited China during the Tiananmen Square upheaval – Beijing and Moscow had forgotten about the hostility of the Cold War era and started to forge a trade relationship.

Gas, oil and of course, Russian weapons were among the few commodities that China was willing to purchase. There were several meetings between Chinese and Russian top officials to discuss the purchase of Russian gas, but these negotiations bore no fruit: price was the sticking-point. As one could assume, Russia wanted China to pay European prices and Beijing did not agree. At the same time, European routes and markets looked secure, and Gazprom believed that demand for the gas market in Europe was limitless and that prices could only go up.

The upheaval in Ukraine, in which Russia had been involved since 2014, changed both Russia’s dealings with the West and China, and this had direct implications for the Chinese gas market.

It would be, of course, wrong to believe that Gazprom abandoned Europe. Nord Stream 2 and TurkStream 2 remain key to realising Gazprom’s ambitions. Still, since 2014, China had re-emerged as the second major pillar of Gazprom’s strategy, and in 2014 Putin’s visit to Beijing led to the plans to build Power of Siberia. It would send five times more gas to China than the amount sent to Europe.

The price for Russian gas had been the major reason for not signing the agreement before. But by 2014, the problems had disappeared, and it looked as if Gazprom had agreed that the final decision in regard to gas prices could be solved at a later date.

The reason for such readiness to compromise was manifold. The most important, of course, was the assumption that the Western direction was not a sure deal: NS 2 could be blocked at certain stages, or the Europeans could find alternatives to Russian gas for economic or geopolitical reasons, or both. At the same time, the situation with Power of Siberia is different. It is to be built through Russian territory, and there is no external force which could prevent it. It was not just these considerations which led to Gazprom’s assumption that the Chinese direction was the most promising. This view was substantiated by Russian experts’ view of China and its relationship with the outside world.

Here, Russian experts took into consideration the following. First, they assumed that China’s appetite for gas would be insatiable and not only because of the country’s economic growth but the Chinese leadership was also moving from polluting coal to more environmentally friendly gas. Second, China is emerging as the rising and finally hegemonic power of the 21st century and while Russian pundits might not be aware of Thucydides’ trap, they clearly believed that China would inevitably collide with the US in this or that way, and that both the people in Beijing and those in Washington understood this. Russian pundits believed that people in Beijing suspected the security of LNG deliveries as they could be cut off at any time by the American fleet, and it would take China a long time before it could match the US navy.

Consequently, the Chinese leadership understands that not only is Russian gas essential for China’s survival, and, even more so, its rise; but it is the safest way to get gas. But right from the start of current US administration Russia began to worry that China could get LNG from the US.

It seemed plausible by the end of 2018 that the China-US relationship was heading toward a full-fledged trade war. Moreover, China’s support of North Korea, and other signs of hostility, implied that China and the US were ratcheting up the geopolitical tensions once more. These feelings of reinvigorated geopolitical hostility have been reinforced by a stream of American publications which bore an anti-China bias and emphasised its inevitable doom, leaving China no other friendly power except Russia. This sense of rekindled love was reinforced by big Russia/China military manoeuvres and Xi/Putin visits. There was increasing talk that the Power of Siberia would not be enough and additional gas lines would be needed. In September 2018, some Russian observers believed that China’s appetite for Russian gas was so strong that Russia could even send China gas originally destined for Europe.

All of this was looking promising for Gazprom until recently when the situation started to change, and these changes have made Gazprom worry. First, China and the US dodged a full-fledged trade war, and it looks as if China is ready to accept Trump’s key demands and buy more US gas. Second, China might be able to achieve self-sufficiency and need neither American nor Russian gas.

 China needs time to be a full-fledged superpower, create its high-tech base and not be dependent on the West. It also needs time to create a network of dependent countries along the “Silk Road” and beyond. If this project succeeds, China would play the leading role in Eurasia and need neither American technology nor the American market and dollars. But before this goal can be achieved, China needs to maintain the trade relationship with the US. Paradoxically enough, China’s increasing economic strength has become the country’s weakness in dealing with the US. While China increasingly sells industrial goods to the US and the rest of the world, the US could offer China fewer industrial goods. There are few commodities which the US can offer China and, implicitly, the rest of the world: agricultural products and LNG. In this regard the US increasingly looks like Russia, which Senator McCain called just “gas stations.” This trade pattern looks eerily similar to the trade between industrial powers of the past and their colonies, which were merely the suppliers of raw materials and food for their European governors.

These arrangements, in which China would be increasingly the supplier of high-tech industrial goods and the US would emerge mostly as a raw materials supplier, hardly bodes well for the US’ economic future. In addition, the US apparently agreed to accept at least some payments for gas in the form of China’s own T-bills. This was also a preferable solution for China, whose leaders see not only low yields on the T-bill, but also the possibility of the US defaulting, or other actions which could cause T-bills to reduce or lose value. China’s desire to buy more American LNG apparently pleased Trump, focusing on the short-term matter of his 2020 re-election bid.

The possibility of a China/US LNG deal has alarmed Gazprom, which still has not agreed a fixed price for its gas. However, more alarming for Gazprom is another threat: China could develop the technology allowing it to extract a huge quantity of gas from what had been inaccessible deposits.

Some Russian observers have tried to reassure their readers by noting that it is quite unlikely that China could make such a breakthrough. In addition, gas extraction from shale requires a lot of water, and this commodity is in short supply in China. Russian observers also noted that gas extraction could well lead to earthquakes and social unrest.

But Russian observers were clearly concerned with the possibility of a scenario such as China’s ability to increase its own gas production substantially. In this case, China might not need any type of gas, or at least scale purchases down. This could include LNG.

If this happened, China would need neither Russian nor American gas and, it was implied, could export gas itself. As a matter of fact, some Russian observers noted, China has already bought too much Russian gas and is ready to sell it on the foreign market. The decline of interest in gas was caused by many reasons. One of them was the discovery that gas could not easily replace coal.

While the Chinese market emerged as not as lucrative or even as secure, as Gazprom had thought before, the situation on the Western front, so to speak, is also not as rosy as Gazprom would like to present it. The price of gas had declined sharply in Europe by the beginning of 2019 and Nord Stream 2 still has obstacles in its way.

All of this alarmed Russian observers. The response was manifold, and, in a way, contradictory. Some noted that those who believed in a mutually beneficial Russia-China axis based on politics and trade were fooling themselves: China was just using Russia as a cheap source of raw materials. China, in this interpretation, had been working in cahoots with the US to take advantage of Russia.

Another implication has a different nature. The fear that China might not need Power of Siberia gas pushed Gazprom to speed up construction. It is assumed here that if the line were built, China would buy Russian gas regardless of its actual need. The reason would be more geopolitical than economic. Beijing would not try to antagonise Moscow.