Stakes are big in Russia-China gas talks

Price, routing, participation all barriers to moving Russian natural gas to markets in China, which is largest gas

Bill White

Researcher/writer for the Office of the Federal Coordinator

Buried across the vast Siberian steppe and taiga of Russia’s Far East lie spectacular reservoirs of natural gas, largely untapped because there is little local demand — the land there is thinly populated and lightly industrialized.

But over Russia’s southeast border, the Chinese economic colossus is thirsting for natural gas to help quench its growing consumption of fossil fuels.

Even as China is dotting its coast with new liquefied natural gas receiving ports and getting pipeline gas from far-flung Central Asia outposts, no gas pipelines cross the Russia-China border.

This is one of the great ironies of the world’s gas trade, that what would appear to be a natural fit — a stranded supply finding a ready market in a nearby booming economy — has not occurred, even as other, more distant suppliers have rushed into the market.

Gas flows into China from Asia and the Middle East, Australia, Africa and South America. In 2011, China even received a shipment of U.S. gas, from the nation’s only operating LNG-export plant, in Nikiski, Alaska.

Supplying China could be the great prize for future natural gas exporters, including a possible multibillion-dollar LNG project that would liquefy and export Alaska’s North Slope gas. (The Nikiski plant in Southcentral Alaska processes gas from the neighboring Cook Inlet fields, not from the huge North Slope fields in the Arctic.)

Gas slakes only a small portion of China’s energy demand. But the nation’s consumption of gas has been soaring and is expected to continue doing so — possibly quadrupling in the next 20 years. China has been importing gas since the mid-2000s, after its gas consumption outstripped domestic production. Every year it imports more gas, even as the country tries to develop more fields internally to try to limit the need for costly imports.

Over the past 20 years, Russian and Chinese officials have shaken hands, signed agreements in principle and made many announcements about how they’re working together to bring Russian gas to Chinese power plants and other consumers.

Yet the smiles, words and pieces of paper have not yet led to any border-crossing pipelines. The two nations have been deadlocked. The reasons are varied, from historical baggage, to differences of opinion about pipeline routes and ownership, to each nation’s geopolitical considerations within East Asia.

But the Great Wall that separates the two is an old bugbear that has scuttled many a business deal over the eons: The two sides have been unable to agree on a fair price.

The stalemate

The stakes are too huge.

This winter’s choking air pollution in many Chinese cities is accenting the call for reforms to steer the country away from vehicles burning dirty diesel and power plants belching coal ash. China consumes almost as much coal as the rest of the world combined.

China is quickly embracing natural gas. The country’s leaders hope gas will account for 12 percent of the national energy mix by 2030, up from about 5 percent now.

A recent paper on the impasse with Russia says China needs to secure long-term supplies in the next few years to achieve that goal. Its ambitious embracing of natural gas likely will account for about one-third of global gas-demand growth through 2030, said author Keun-Wook Paik, senior research fellow at The Oxford Institute for Energy Studies in the United Kingdom.

And for Russia, Paik wrote, “A pipeline to China would open the door for its extension to both South Korea and Japan, providing all three with both pipeline gas and LNG import options. Cooperation among these top three gas importers could lay the foundations for the establishment of an Asian Gas Consumers Union.”

The delay in Russian gas deliveries has frustrated both sides.

As a Chinese energy planner said in 2007, “The Sino-Russia pipeline question is one step forward, two steps back. Today is cloudy with a chance for sun, while tomorrow is sunny with a chance for clouds. One moment Russia is saying they have made a decision, the next saying that no decision has been made.”

Still the stalemate continues. A Platts editor recently put it this way: “Continuing failure to agree would be a loss for both sides and other countries as well. It would deprive both countries economies of an obvious win, by finding a home for stranded gas reserves, as well as increase future global rivalry in the LNG market, with a knock-on effect on world prices.”

Lots of talk, little action

In the period leading to the early 1990s, Russia had discovered big oil and gas fields in its Far East, out beyond its vast internal and export pipeline networks. The resource was stranded in Siberia, unless a market could develop. BP and Statoil studied the potential, but backed away from a joint venture for lack of obvious buyers.

China was not perceived as a potential customer then. China and Russia were Cold War enemies. Their joint histories ran even deeper than that. The Chinese and Russians had fought many territorial wars and skirmishes in the centuries since the first Cossack loggers ventured to colonize the east.

In 1860, six months before the U.S. Civil War erupted, a weakened China ceded to Russia control of Outer Manchuria — a swath of China larger than Washington, Oregon, Idaho and Nevada combined that now comprises the southeastern-most portion of Russia. The loss still smarts with some Chinese. (Russia wasn’t the only imperialist picking at China. The United Kingdom expanded its Hong Kong territory a month earlier.)

But in the early 1990s upheaval came.

The Soviet Union fell apart. Communist China was beginning a dance with market economics. Relations thawed.

In 1993, China National Petroleum Corp. started negotiations to explore Siberian oil and gas prospects.

In the next six years, three memoranda of understanding got signed. The two countries agreed to work together to define the size of resources and study how to pipe the gas from the Irkutsk region to northeast and northwest China in two separate mega-pipelines.

For Russia, this was a chance to provide gas to locals, develop a petrochemical industry, and possibly even export gas-fired electricity as well as the methane itself to a new market. With further build-out of its pipeline network, Russia could position itself to route its ample gas reserves to Europe in the west or Asia in the east, giving it leverage to play one market against the other.

For China, leaders saw a crisis looming. Energy demand was skyrocketing but domestic oil production was stagnating, even falling in the industrial northeast. Meanwhile, the day approached when gas consumption would outpace domestic production. Facing a threat to their nation’s expanding economy, Chinese leaders in the early 2000s got busy lining up new supplies.

Russian oil and gas weren’t the only resources in play. The Chinese opened negotiations with Turkmenistan, Kazakhstan, Uzbekistan and Myanmar, all of which had huge reserves looking for a market. Unlike Russia, they quickly came to terms, and new gas pipelines from those four countries now are operating, expanding or under construction.

A key difference is that Turkmenistan and Kazakhstan in particular welcomed Chinese investment along the value chain, from the wells and field development to pipelines.

Negotiations had a different tone with the Russians. Russia blocked Chinese equity stakes. Russia also wanted the shortest pipeline routes possible. Such as through Mongolia. But the Chinese wanted the pipe routed around that nation to keep the supply secure.

The talks dragged on.

In 2006, Russian gas company Gazprom and China National Petroleum Corp. signed a memorandum of understanding on two gas pipelines. They would be big — each as big as the possible Alaska North Slope gas pipeline or even bigger. One would carry up to 2.9 billion cubic feet a day to northwest China, linking to a Chinese pipeline hub there. The other line’s capacity would be up to 3.7 bcf a day, delivering the gas to the northeast China industrial hub.

If those projects had been built and the pipelines were running full, they could supply China with about half of the natural gas the country consumes today. But they haven’t been built. The companies couldn’t agree on a price for the gas.

Price also is a barrier to consummation of Gazprom’s 2010 announcement of a binding accord with CNPC to export up to 2.9 bcf a day to northwest China.

And price could blunt Gazprom’s plan announced in October 2012 to build a gas trunkline from Irkutsk to the Far East port of Vladivostok, north of China, a project that likely needs a spur to northeast China to take some of the gas. (Japan and South Korea could be export customers, too, keeping Russia from depending on a single customer.) Like much about Russia and China, this project would be almost unimaginably massive. The pipeline would span 2,500 miles — roughly the distance between San Francisco and New York — through swamps, mountains and earthquake zones. It would carry up to 5.9 bcf a day of gas.

Last fall Gazprom held a contest to name the project. “Power of Siberia” took the prize. The winner gets a trip for two to Siberia.

Part 2 of this story will appear in the March 3 issue of Petroleum News. Editor’s note: This is a reprint from the Office of the Federal Coordinator, Alaska Natural Gas Transportation Projects, online at www.arcticgas.gov/stakes-are-big-russia-china-gas-supply-talks.