China wants to diversify the sources of energy consumed by its millions of factories. And Russia wants to replace a pesky customer — Europe — that has been critical of its invasion of Ukraine and doesn’t want to pay rubles for the gas it receives.
At first, it seems that the two powers could understand each other and become major trading partners, especially at a time when both face a difficult relationship with the West.
Analysts say the biggest beneficiary would be Russia, which could partly avoid international sanctions imposed over the Ukraine War. And it would still be able to sell part of the gas production that it stopped sending to Europe, which is its biggest customer.
After all, European governments have spent the last few months trying to reduce their energy dependence on the Kremlin. Until then, Russia supplied 40% of the gas consumed by the European Union.
But strengthening those ties can take years, especially considering the energy infrastructure.
The clearest example of this long-term relationship is the Power of Siberia 1 pipeline, which Russia’s state-owned energy companies Gazprom and China National Petroleum Corp. been building for about eight years.
The pipeline will be able to send gas from Siberia, Russia, to Shanghai, on the coast of China, covering a distance of 3,000 km. It is in the final stages of construction, but has already been supplying fuel to several points in northern China along the way.
And while the pipeline began operations pumping only a fraction of its capacity, the data shows that war has driven its use. Russia has been sending more gas to China since February, when the invasion of Ukraine began.
“The pipeline can supply up to a total of 38 billion cubic meters [bcm] per annum. But before the conflict, Russia exported about 4 or 5 bcm. Now, the supply has increased by 63.4% and the idea is that, in 2023, full capacity will be used”, says Pablo Gil, chief strategist at stockbroker XTB for Spain and Latin America.
Russian crude oil exports to China have seen a considerable increase of 54.8% per year, which has led Russia to temporarily overtake Saudi Arabia as the largest supplier of oil to the Asian giant.
Is Russia ready to replace Europe with China as its main gas customer? “This is Russia’s plan, but it doesn’t seem possible in the short term,” explains Ángel Saz-Carranza, director of the Center for Global Economics and Geopolitics at the academic institution Esade in Spain.
“In 2021, Russia exported only 3.5% of its gas to China and more than 40% to the European Union. Now, with the only gas pipeline available (the Power of Siberia 1), the ability to export gas to China through tubes is 60,000 bcm, but only 35,000 bcm were contracted by the Asian giant”, explains Saz-Carranza.
If we compare these numbers with the nearly 150 bcm that make up the total capacity of the tubes connecting Russia to Europe, it is easy to understand why replacing European customers will not be an easy task.
“Russia would probably be delighted, but it cannot do that, at least for gas. The capacity of the existing network between Russia and China is limited. This means that the gas that Putin cannot or does not want to sell to Europe is yet to come.” cannot go to China,” says Alicia García Herrero, chief economist for Asia and Oceania at French investment bank Natixis and a researcher at the Belgian think tank Bruegel.
The fact is that, currently, there is no way for Russia to divert gas that is no longer sent to Europe to China, although its fields continue to extract millions of cubic meters a day. But the Kremlin is already looking to the future.
New pipeline network
Moscow is evaluating the construction of several gas pipelines that will allow it to expand its presence in the Asian market, which has not received attention for years due to the enormous needs of Europe.
“We know that the Chinese market is the most dynamic in the world and, in the next 20 years, the increase in gas consumption in China will represent 40% of the increase in the world’s gas consumption”, according to the president of Gazprom, Alexey Miller, recently stated.
One of the most important projects currently is a second branch of the Power of Siberia gas pipeline, which will be called Power of Siberia 2. This new pipe will be able to transport 50 bcm of natural gas per year to China.
“The Power of Siberia 1 pipeline is not connected to the pipe that sends gas to Europe, which means it is not possible to divert production the other way. But that will change when Power of Siberia 2 is built – or at least , this is the plan”, says García Herrero.
“After all, what Russia wants is to have the capacity to send around 100,000 bcm per year to China when all this infrastructure is in place”, says Gil.
“It’s a new infrastructure, which will require a lot of investment from Russia,” he adds. “It’s a process that I believe was planned thinking about 2027, which is the date on which Europe proposed to end all its dependence on fossil energy consumption from Russia. In other words, we’re talking about a five-year project .”
“Somehow Russia wants that, when that moment comes when it may not have a European customer for its oil and gas, the necessary infrastructure has already been built to have other customers who buy its energy, which is the main source of revenue in the country”, concludes Gil.
“If Russia wants to turn its gas resources into cash in the future, it needs to invest in new infrastructure and find new buyers, including China,” explains Norbert Rücker, head of economic research at Swiss bank Julius Baer.
Western sanctions, which began when Russia annexed the Crimean peninsula in 2014, are forcing the country to seek out new customers such as China and India. These countries have not adopted the sanctions imposed by the United States and Europe.
Best prices to China
But these same sanctions are allowing China to buy gas that Russia cannot sell to other countries at advantageous prices. And, eager to expand its sources of energy imports, Beijing has refused to condemn Moscow for its invasion of Ukraine.
Natixis believes that “the Western embargo on Russian energy could help China reach a deal at below-market prices.”
For the investment bank, Russia clearly needs China’s support, not only to buy the gas, but to allow the importation of many other inputs, such as the semiconductors necessary for Russian industries (including the military) to continue operating.
“There’s a reason the Power of Siberia 2 hasn’t been built yet,” says Rücker. “It’s a very long and complex pipeline — and therefore also very expensive.”
new alliances
One of the unknowns at the moment is why Russia is committed to having the Power of Siberia 2 pipeline route through Mongolia.
Chinese media speculate that while a third-country participation will increase the project’s construction and energy costs, it would help Russia strengthen its economic ties with Mongolia — and thus prevent its neighbor from turning to Mongolia. the United States.
“This aroused a great deal of controversy”, according to Pablo Gil. “Instead of passing the pipeline directly from Russia to China, they will pass it through Mongolia, which will take part of the profit.”
He adds that “it’s true that including a third player increases the cost of shipping, but in return they try to create a unit in Asia against the West.” Which makes sense if we consider that the United States’ objective was to attract Mongolia with investments.
This text was originally published here.
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