Report

Another Russia-China Energy Deal?

Another Russia-China Energy Deal?

If Vladimir Putin gets his way, Russia’s eastern energy pivot is just beginning. That could make Russia a swing natural gas supplier between Europe and Asia — good for Russia but potentially bad for Europe, which could see what leverage it has over Russia’s energy sector wane.

Mere weeks after Russia and China inked a historic $400 billion natural gas deal, Russian officials are talking big about sealing another huge energy contract with Beijing.

"If it materializes, it will be a dream situation for Russia but will be a nightmare for Europe," said Keun-Wook Paik, an expert on Sino-Russian energy issues and a fellow at Chatham House.

Russia would get another outlet for its gas exports, possibly regaining some leverage over Europe, and China could further free itself from coal’s chokehold.

Kremlin Chief of Staff Sergei Ivanov said on Wednesday that the successful conclusion of the first gas deal in late May, coupled with China’s seemingly insatiable appetite for gas, could open the door to a stalled project Russia has dreamed about for at least a decade.

"Considering the pace of China’s economic growth and the agreed pricing formula, I’d say it is very likely that we will soon conclude a contract to build a western [pipeline] before long," Ivanov told reporters, according to Russian and Chinese media.

Ivanov’s comments echo what Putin said immediately after finalizing the Shanghai deal: "This gives us the chance to start work on our next project with our Chinese partners, namely, planning a western supply route from the resource base in western Siberia."

Moscow favors this so-called western route because it requires less investment and would allow it to supply Europe and Asia from the same gas fields; theoretically that could give it greater market power and enable it to play two big customers against each other.

That is no small matter when European demand for gas is sluggish, and when many European countries are searching for alternative energy sources after Russia’s annexation of the Crimean peninsula and given its hardball tactics over gas exports to Ukraine. Russian reliance on revenue earned from energy exports to Europe ties its hands in much the same way that reliance on Russian energy ties Europe’s.

"It is a part of Gazprom’s strategy to activate the Altai export route, which will ultimately make Russia the swing supplier between Europe and Asia," Paik said.

"It will take time to strike the deal, but if the terms and conditions are met, an early breakthrough cannot be ruled out," Paik said. "However, Russia has to make some sort of compromise for this deal, as China will not bite the bullet without a real incentive."

China’s sparsely populated west hasn’t been particularly thirsty for natural gas. But Beijing has clamored for Russia to ship to its denser, more industrial northeast.

Though the two sides signed a preliminary deal in 2010 on the so-called Altai pipeline in the west, the project basically died last year. Then, after more than a decade of haggling, Russia finally agreed in May’s deal to develop new gas fields in eastern Siberia and feed China’s northeast.

But Russian officials’ remarks about reviving the Altai pipeline don’t mean China’s ready to play ball, especially after securing 38 billion cubic meters of Russian gas for 30 years. And bringing the Altai project to fruition still requires significant Russian investment.

"It might be less capital-intensive than the eastern one, but it’s no doubt going to cost us tens of billions of dollars," Ivanov said.

Gazprom needs recapitalization in order to deliver on the first deal, according to Putin, so where Russia will find billions more is unclear.

Equally unclear is how much more Russian natural gas China needs. Central Asia has guaranteed it large amounts and China is building terminals to import liquefied natural gas to the coasts. Beijing also hopes to develop its own shale gas reserves, which, on paper, are among the world’s largest.

And Russia already made concessions to secure the existing deal with China, agreeing to a lower long-term price than it receives from European customers. Shipping to China’s sparsely populated west, far from the centers of Chinese energy demand, will hardly command a price premium.

"Unlike the eastern route, the Altai pipeline will hit the Chinese border in the middle of nowhere, far from gas-consuming regions," said Mikhail Korchemkin, the head of East European Gas Analysis, an energy consultancy. That means Russia might have to offer an even lower price to secure a second deal, he said.

That could benefit Europe. If the first gas deal promised to lower prices in both Asia and Europe, a second pact at an even lower price would embolden buyers from Brussels to Berlin.

"Europeans would use the low price of gas sold by the Altai pipeline to China to lobby for lower prices of Russian gas," Korchemkin said.