The Gas Triangle: China, Russia, and Europe
The competition for Caspian gas supplies is usually seen as a contest between Europe and Russia. China, although acknowledged to play a role, is generally seen to be a marginal player. But at a recent Chatham House event titled Rebalancing the World Energy Markets: The Role of China, Russia and Central Asia it was underscored that Chinese energy demand will have a profound effect on energy markets: in Russia, Central Asia, and Europe.
Gas, in particular, is likely to become increasingly important in China’s energy mix. Even though, as one speaker put it, it could “never win a straight fight” on cost compared to coal, and remains expensive domestically, gas has risen from 2.4% in 2000 to 4.3% in 2010 and is targeted to reach 8.3% in 2015.
This takes place in the context of steadily rising overall demand over the next 20 years, although speakers varied on the expected scale of the demand. One estimate put 2020 (conventional) gas consumption at 230bcm, whilst another suggested 200bcm; one 2035 estimate suggested 550bcm whilst a 2030 baseline estimate was 390bcm, with 500bcm as a maximum estimate. In the Chinese context 30bcm here and there is fairly inconsequential – not so for Russia or Central Asia looking to build new pipelines.
Indeed the distinction between piped gas and LNG, and the latter’s increasingly preferential position, were clear. Given the geography of the Chinese economy, with most gas-hungry industrial areas located around the coastal belt, there was a sense that China was prioritising LNG over massive new pipelines. This is despite persistent security concerns about LNG, which has to pass through the Malacca Straits.
Although Chinese demand is clearly booming, LNG imports and domestic production (from both conventional and unconventional resources) will cover the majority of that demand. One speaker projected that domestic production and existing gas contracts will cover Chinese demand growth until a ‘niche’ of about 25bcm opens up in around 2025 and gradually expands thereafter.
So the notion of China of having bottomless demand for all types of gas is “something of a myth”, the implications of which for Russia and Central Asia are significant. Russia, in particular, is going to struggle with its current gas export plans to provide around 70bcm a year to China.
One speaker suggested that the failure to agree on Russian gas exports to China is because neither side actually wanted it. As noted above China simply does not have the demand gap yet, certainly in the northeastern provinces where the gas would go (which will benefit most from new LNG terminals). Russia has dragged its heels, the speaker said, because it has nothing to offer at the moment. East Siberian gasfields and infrastructure remain seriously underdeveloped, a fact which multiple participants pointed out, part of a wider trend of socio-economic underdevelopment in eastern Russia.
By 2020 the best case scenario for eastern and far eastern Siberian export potential is 55bcm, which is not exactly a game-changer. The capex costs of building, modernising and maintaining infrastructure – for production, processing, transit, and export – are huge, and there is still some debate about whether the costs are worth it.
However, China is not (contrary to most assumptions) the only game in town. Asia has other gas-hungry economies for Gazprom’s new LNG plant at Vladivostok. Taiwan, Japan, and South Korea all look like promising targets, one speaker said.
Indeed there was a strong sense that Gazprom was increasingly spending time and money focusing on the Chinese and wider Asian markets. This trend towards rebalancing eastwards, one speaker proposed, was largely responsible for the sudden halt to the Shtokman project in August. He said that it reflected a growing sense within Gazprom that there was no point spending billions on such projects when investment should be switched eastwards.
Central Asia is also a vital part of the equation, with one speaker calling it “the fulcrum point” in Russia-China relations. Given the pace of China’s geo-economic expansion into the region, it is increasingly becoming a factor in Europe-China relations too. One speaker noted that although Russia has, admittedly, become less influential in the region the EU has not filled the gap, as ‘Great Game’ proponents suggested: instead China has moved in. This has extended as far west as Turkey, where China is providing a $30 billion loan to build a high-speed rail network as part of a ‘new silk railroad’, one participant said.
This has created challenges for Brussels, and EU-China energy cooperation remains tentative. One speaker suggested that Europe “should not just welcome China to the club so much as change the clubhouse” on energy governance issues. But he also noted “an attempt to lock in reserves and avoid market mechanisms” by Beijing. Europe is finding it difficult to compete with this, and it remains to be seen if China wants to come into the clubhouse at all.
One of the keystones to China’s presence in Central Asia, it was suggested, is the willingness of Central Asian states to provide upstream equity. This is a model that Chinese giants like CNPC and Sinopec have followed throughout the world, but Central Asia’s proximity to Chinese markets makes it a case in point. Energy-backed loans, another oft-used Chinese model, “are no substitute” for a stake in upstream projects, one participant said. In Turkmenistan, for instance, Chinese funding for the Central Asia-China pipeline was conditional on a lead role in developing the Galkynysh field which will feed it.
The attraction for Central Asian states is clear. China is willing to provide massive funding, technical expertise, and political support in exchange for resources – unlike either the EU or Russia. But this does come with costs. As one speaker observed, Turkmenistan’s “future has been mortgaged to China”, faster than anyone expected. This will have ramifications down the line.
Where does the EU fit into all this? As noted above, there was a sense that China is playing a different game entirely, with “no transparency whatsoever” when it comes to the markets. True as this may be, the complaint is not helping Brussels to compete with Beijing on gas supplies. As one participant acknowledged, on issues like physical security across jurisdictions the EU was just waking up; China was already up and running.
The conference underlined the fact that increasingly, the old north-south dynamic between Russia and Central Asia, with Europe seeking to pull in Central Asia and Russia angling to stop it, is eroding. Now both Russia and Central Asia, their mutual links becoming less and less significant, are being pulled west by Europe and east by China. Geography and politics means that Central Asia is moving into the Chinese orbit far more than into the European.
Russia, meanwhile, remains poised between the two. Increasingly embattled in Europe, and unable to effectively deal with the Chinese market, it finds itself in a difficult position. But as speakers repeatedly noted, it cannot do without them; nor can Europe or China do without Russia. Moscow’s challenge is to turn this increasing triangulation into a strength, rather than a weakness.
Alex Jackson is an analyst of political, energy and security issues in the Caspian region. He is based in London and can be contacted at firstname.lastname@example.org.