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    [NGW Magazine] China's Long Gas Game


This article is featured in NGW Magazine's Volume 3, Issue 9 - Russia could be the beneficiary of worsening relations between China and the US, as it could provide the gas that China will need; however, this could be a double-edged sword. For Trump though, losing the Alaska deal would be a bitter pill. (Image: China's president Xi Jinping and Russia's president Vladimir Putin | Credit: Kremlin)

by: Dmitry Shlapentokh

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Natural Gas & LNG News, Americas, Asia/Oceania, Europe, Premium, NGW Magazine Articles, Volume 3, Issue 9

[NGW Magazine] China's Long Gas Game

Russia could be the beneficiary of worsening relations between China and the US, as it could provide the gas that China will need; however, this could be a double-edged sword. For Trump though, losing the Alaska deal would be a bitter pill. 

Russian observers have noted China’s growing interest in the development of a trade relationship with Russia and its interest in buying more Russian gas. They explain this in terms of China’s reduction of coal, but China’s interest in Russian gas is also due to geopolitical concerns as well as environmental.

Beijing’s rising tensions with Washington could well lead to a full-fledged trade war, so it needs to let Washington know that it might not after all buy US gas. It could also spell the end of, or at least delay, the Alaska LNG project which Trump hailed as an important way of cutting America’s trade deficit with China, which would be popular at home.

The economic relationship, including Beijing’s intention to purchase either Russian or American gas, has to be understood within the context of China’s general geopolitical stance. Geopolitical concerns are separate from economic concerns. As they function with short-term horizons, capitalist societies tend to avoid war or any investment in grand projects that cannot be translated into near-term cash. But for totalitarians, geopolitics and economy are dialectically connected: Beijing wants economic benefits, and is prepared to wait decades while projects, such as canal-building, slowly repay the investment.

This model can be seen in China’s Silk Road project. The project implied the building of a web of roads which would connect China with most of Eurasia at a cost of billions or even trillions of dollars. This might make no sense to US business; but for China, the project will reap a huge economic benefit in the distant future, when it has become the master of Eurasia.

The drive for semi-autarky

China’s gas demand has risen and is continuing to rise but its emphasis is on economic self-sufficiency, as that makes it harder for foreign powers to influence its economic and, implicitly, political life. It includes the increasing tapping of renewable energy and domestic shale gas, even if its gas production has not always demonstrated a steady rise.

The US Energy Information Administration estimates that China may have as much or more shale gas than the US, but development has been sluggish. Overall, China’s annual domestic production growth has decelerated from more than 19% in 2005 to less than 12% in 2010 and just over 2% in 2015. There are clearly some problems with shale gas projects. Yet China is increasingly stressing the importance of its own gas.

Another way to ensure energy independence is to diversify the countries from which gas could be received. Consequently China buys, or plans to buy, gas from many countries. Last year its biggest suppliers were Turkmenistan (36%), Australia (25%), Qatar (11%), Malaysia (6%) and Indonesia (4%).

Beijing wants to prioritise diversity – importing from multiple nations across a variety of transport routes and contract structures – and affordability. This serves as a hedge against supply shocks and also provides multiple ports of entry to channel natural gas into different Chinese regional markets.

When China first became a net importer in 2007, it received shipments from just four nations; today, 26 nations supply natural gas to China. There is no purely economic urgency to buy US gas, given its choice of other suppliers, shortly to grow dramatically when both Power of Siberia and the new gas line from Turkmenistan start.

In addition, US gas has no competitive advantage over other suppliers to China, although its LNG is cheaper at the jetty than some other gas. It is from this perspective one should look at China’s Alaska venture and recent flirtation with Russia.

Alaska proposal

The Chinese proposal to invest in Alaskan gas was not so much an economic as a geopolitical proposal. According to the deal, China would make considerable investments in Alaskan gas fields and gas would then be sold to China. Primarily, it was a plan to bring the US, in the long run of course, under China’s control; but the other, more immediate, goal was to please Trump and his electorate. Trump needs the electorate’s support, not just for re-election. A supportive electorate is needed to prevent Trump’s possible impeachment.

When Chinese leaders proclaimed that China’s rise would be “peaceful,” they are not necessarily deceiving Westerners. China will clearly strive to have at least military parity with the US, but for defensive reasons.

China’s quest for global predominance is based on economic power over other countries. Beijing also believes that rising economic woes and debt would compel the US and other Western countries to accept this model of interaction with China. And Trump’s move seems to follow China’s plan.

So far both the US and Australia have prevented China’s state-owned enterprises from controlling their domestic oil and gas resources: both the quantity they produce and where it is sold.

In the US, however, Trump is aiming to change that arrangement. When he visited Beijing in November, the two presidents oversaw the signing of a preliminary agreement between Alaska and three Chinese state-owned enterprises – China Petrochemical Corp (Sinopec), China Investment Corp (China’s sovereign wealth fund), and Bank of China – in which the Chinese firms would bankroll Alaskan pipeline infrastructure in exchange for guaranteed access to 75% of the gas produced over the duration of the project.”  

Not only does this give China control over the commanding heights of the US economy, but it would turn a portion of the US into a raw materials appendage. According to Hart, Bassett and Johnson, in their April 28 paper ‘Do not fall for the hype on US – China natural gas trade’, “Chinese President Xi has big ambitions. His vision for an ideal future US-China economic relationship is one in which the US exports commodities to China while China steadily edges the US out as the dominant player in global high-tech markets, including clean energy markets. In that scenario, the US gets the lower end of the value chain and China dominates the higher end, thus winning the best jobs.” 

While the above-mentioned goals benefit China enormously in the future, it looks like a great deal for Trump and his electorate. First, the money comes from China and is invested in the US economy.

Secondly the purchase of American gas cuts the deficit. The proposal was to please Trump and his electorate which believes the trade deficit is the source of its economic ills.

But the story altered when people in Beijing started to watch what was going on in in Washington: it was not encouraging. To start with, Trump’s position became precarious as there are continuous attempts to impeach him on a variety of grounds. In one interpretation, he was put in office by the Kremlin’s nefarious engagement in the American election. In another interpretation, he is a lecherous and semi-criminal individual.

Trump’s impeachment could well put an end to his intention to let China-related companies, well-connected to the state, buy American companies, including those dealing with gas. Another, scarcely brighter, scenario implies that Trump stays in power. But he has intensified the contact with Taiwan, undermining the notion of “one China,” whereby Taiwan is just a runaway province. And Beijing has often threatened war if Taiwan were to announce formal independence.

Equally unsettling was some aspects of Trump’s trade policy. Soon after the Alaska deal, Trump introduced tariffs on steel and aluminum (see separate feature). There is also the spectre of a broad trade war. China anticipated this move. Beijing immediately imposed tariffs on some US products, including foodstuffs which would hit farmers. And it was they who are among Trump’s most ardent supporters. One could assume that China already had a detailed plan for how to respond to other possible actions from Washington. They might well include the Alaskan gas deal.

And the signals are sent in an indirect way. Beijing clearly indicated that its interest in Alaskan gas is mostly a political move designed to please Trump, and if Trump does not return the favour, Beijing has plenty of other providers, Russia among them, which could supply as much gas as China needs. Moscow, of course, is pleased by these hints. To start with, it reassures Gazprom that when Power of Siberia is finished, China would be possibly open to other deals.

China/Russia rapprochement

Neither Moscow nor Beijing has been anxious to lock themselves into a “monogamous” geopolitical marriage which would preclude them from dealing with other partners, including the US. Both want to use the relationship with each other as a bargaining chip in dealing with Washington.

One could assume that Washington would do the same. Indeed, during the Cold War, after Nixon’s visit to China, Washington actively used Beijing as a counterbalance to Moscow. That does not work at present as the political culture of the US has changed considerably. 

After the collapse of the USSR – explained by people in Washington as the clear inability of totalitarian regimes to compete with Western capitalism – Washington lost any aptitude for compromise. Consequently, it pressed both Beijing and Moscow at the same time, and pushed them closer to each other, possibly regardless of Beijing’s and Moscow’s will.

At present, Moscow and Beijing’s relationship has strengthened, and Beijing actively uses the Moscow card in dealing with Washington. For example it joined Moscow in calling for an independent investigation into the poisoning of the ex-spy and his daughter, the Skripals, in Britain.

Returning the compliment, Russian observers noted that the US had allowed top officials to visit Taiwan and implicitly violate the “one China” policy.” Washington’s simultaneous pressure over Beijing and Moscow led to increasing desire of both leaders to co-ordinate their policies. For example, there are plans for a meeting between the two presidents, Vladimir Putin and Xi Jinping in 2018.

China also demonstrated a strong desire to engage in a variety of economic projects including copper and uranium extraction in Russia. Trade and cultural ties between Russia and China are also strengthening: for example China buys a considerable amount of Russian grain; and Chinese is taught more in Russian schools.

Russia, which has an issue not just with the US but also with Europe, is anxious to move closer to China. At the same time, China is ready to show the US that it has Russia as a potential alternative in case of increasing tensions with Washington. It is not just geopolitical, but also an economic alternative. 

Indeed, as was already noted, both notions are integrated in Chinese political culture. Beijing’s approach to gas imports has informed its general approach to Russia. China’s major goal is to limit the importance of foreign gas which could make China dependent on foreign powers. In addition, reliance on LNG creates an additional problem, as it comes by sea and it will take time before China’s navy can match that of the US.

Despite the supposed rise in Chinese demand for gas, Beijing had been lukewarm in its approach to the Russian proposal to build a gas line to China for years. The situation changed in 2014.  

The reason for the change was not just, as one could assume, the considerable price discount, but also Russia’s new geopolitical position. After the beginning of the Ukrainian crisis in 2014, Russia’s relationship with the West worsened considerably, and by geopolitical logic, it started to move closer to the East, with China as one of the most logical options. In this new reading, Russia became not just a provider among many, but a potential friend. Consequently, it required concessions on China’s side.

While Russia’s relationship with the West deteriorated, Moscow did not want to break with the West. This had implications for the Chinese approach. Beijing demonstrated little interest in additional gas from Russia, despite Moscow’s proposal to provide additional gas lines. And some Western observers started to assume that Russia/China energy deals were in trouble.

Now though the recent dramatic worsening of Russia’s relationship with the West and Beijing’s similar tensions with Washington have changed Beijing’s approach to Russian gas and speeding up work on the Power of Siberia, which, as Chinese officials implied, has “geopolitical and strategic value.”

Moscow was clearly happy to provide more gas, for a variety of reasons. Nord Stream 2 continued to face strong resistance from Washington and eastern Europe. The second string of TurkStream is also up in the air owing to Ankara’s new shift in foreign policy and attempts to find a common language with Washington. 

It is true that some Russian observers are realistic: they see Russia’s rising sales of gas and other raw materials to China have transformed Russia into a raw materials appendage for China.

But not everyone sees China’s demands as geopolitical favours which could be withdrawn at any moment. One observer, for example, noted that China indeed has a lot of shale gas, but it is expensive to extract compared with deliveries from Russia. 

TASS, Russia’s official information agency, also is convinced that China’s demand for Russia’s gas is also due to China’s true economic interests, and Gazprom assured China that Power of Siberia is almost completed. Gazprom is ready to send gas to China, not just from Siberian fields, but also from its assets in Uzbekistan.

What is the implication of the story? Chinese interest in different sources of natural gas is not purely economic but it is part of a much bigger geopolitical picture. At present, Beijing has no desire to engage in a full-fledged trade war with Washington and is ready to provide the Trump administration with some economic perks which could appear to be a Chinese concession to the “smart” and “tough” Trump.

At the same time, these perks could, in the long run of course, provide inroads into the American economy and finally influence US politics. Still, the trade and other tensions with Washington could well change China’s economy and geopolitical trajectory toward the USA. Beijing has sent a message that Alaskan LNG is not much needed, and China has plenty of other options, Russia being one of them.

Dmitry Shlapentokh