Official announcements during the recent visit to Moscow by President Xi Jinping re-emphasised the importance of energy in the bilateral relationship. But, despite the rhetoric, energy cooperation has progressed only slowly and has been highly dependent on China providing large loans to Russia.

Russia and China are two global energy powers, but with complementary interests. Russia is the world’s largest producer of oil and of gas, and has ample supplies of water for hydro-electricity. The downside of this endowment is Russia’s continuing dependence on the energy and minerals industries for 10-15% of its GDP and on the energy industry for about two-thirds of its export earnings. In contrast, China has become the world’s largest importer of oil, at times is the largest or one of the largest importers of coal, and is a rapidly growing importer of gas. These supplies of energy and mineral raw materials have provided vital support to China’s infrastructure-led economic boom over the last ten years or so.

 

For twenty years it has been clear that both countries would benefit from the construction of infrastructure to bring oil, natural gas and electricity from Russia to China. Yet, despite the ‘strategic partnership’ proclaimed by Presidents Jiang and Yeltsin in 1996 and the Treaty of Friendship signed in 2001 by Presidents Jiang and Putin, economic engagement in the form of trade and investment has grown only slowly, even in the energy sector. The total value of trade in 2012 was US$88 billion, with most of Russia’s exports taking the form of energy (mainly oil) and other raw materials. 

 

Oil

 

China became a net oil importer in 1993. Since that time the government has developed multiple strategies to enhance security of oil supply including maximizing domestic production, building good relations with the governments of energy- and mineral-exporting countries, diversifying sources of imports, and constructing import pipelines for oil and gas imports from neighbouring states.

 

Building on the momentum created by the diplomatic rapprochement, an agreement was signed in September 2001 for Yukos and CNPC to collaborate in the construction of an oil export pipeline from Angarsk in Eastern Siberia to Daqing in northeast China. This project was first suspended and eventually abandoned in 2005 after the nationalization of Yukos assets. Although oil exports from Russia continued by rail, in its determination to put in place an overland import pipeline, China’s government switched its attention to Kazakhstan and constructed a pipeline which was commissioned in 2005. Only in 2008 was agreement to construct an oil export pipeline from Russia finally reached, with China providing a US$25 billion loan to the Russian oil companies to be repaid in oil.  The East Siberian-Pacific Ocean (EPSO) oil pipeline takes oil to the Pacific coast with a branch to northeast China. This branch has been operating since late 2010 and in 2012 delivered 15 million tonnes of oil to China. During President Xi Jinping’s visit to Moscow in March 2013, Rosneft agreed to triple the annual quantity of oil piped to China. This will require further loans from China.

 

Natural gas

 

Gas has traditionally played a very minor role in China’s energy mix. Only since the discovery of significant domestic gas reserves in the 1990s has gas consumption risen rapidly. Although much of this demand is met by domestic supplies, imports have risen rapidly, first as seaborne liquefied natural gas (LNG) and more recently by pipeline as well.

 

The story of gas trade between Russia and China dates back 20 years.  A Memorandum of Understanding was signed in 1994 to draw up plans for a gas pipeline between the two countries. In 2003 BP, CNPC and the Korean Gas Corporation published a feasibility study for a pipeline to bring gas from the Kovytka field through China and under the Yellow Sea to South Korea. The proposal was undermined by the Russian government’s new energy strategies and BP was later forced to relinquish its interest the Kovytka field. As a consequence of this delay, China turned to the vast gas resources of Turkmenistan. An agreement was signed in 2007 and by the end of 2009 gas was flowing from Turkmenistan to Shanghai.

 

Negotiations between Russia and China on gas exports have taken place almost every year since 2005. At various times, different routes are proposed: from western Siberia southwards to Xinjiang in north-west China by pipeline, from East Siberia to north-east China by pipeline, and from Sakhalin in the Russian Far East to Northeast China, either by sea as LNG or by pipeline. Russia’s slowness to conclude a gas supply deal lies in Russia’s quest for a ‘European’ price from China. China continues to want additional supplies of gas in order to address growing air pollution problems arising from coal use and at the same time it is optimistic about the potential to produce additional supplies from its own shale gas and coal bed methane.

 

At the meeting in March 2013, Russia committed to supplying China with gas from Eastern Siberian gas fields, but the exact route and price have yet to be agreed. The parties’ claim that the deal will be finalized by the end of 2013 will probably be dependent not just on agreement being reached on price but also on the provision by China of a US$ 25 billion loan to Gazprom.

 

Russia and China have been ‘close to reaching agreement’ on gas supplies several times before. Russia may be more willing to compromise on price than before as the likely impact of the shale gas revolution on long-term gas prices becomes more evident. But the capacity to deliver the gas will depend on massive investment in both gas field development and pipeline construction in eastern Siberia.

 

Other forms of energy

 

China also imports significant quantities of coal from Russia. In 2010 the two governments signed an agreement for Russia to raise its shipments from 12 million tonnes in 2009 to at least 15 million tonnes in the short-term and then to more 20 million tonnes, in return for a US$ 6 billion loan from China. In 2012 Russia supplied 19 million tonnes, just over 6% of China’s annual coal imports. The Presidential visit in March 2013 saw agreement to raise supplies further.

 

Other interactions between China and Russia in the energy field include the supply of hydro-electricity from Russia to China and a limited extent of cross-investment in different energy fields such as oil and gas exploration, oil refining and nuclear power.