According to Wood Mackenzie, Russia is shifting its outlook east and is engaging with China on a range of huge deals that could see energy trade between the neighbouring countries quadruple by 2025. Already, agreements for oil, coal and power have been struck but negotiations on gas could prove more difficult. China is keen to secure energy imports from Russia so is financing much of the required infrastructure costs. The information that has drawn these trade conclusions is based on The Global Horizons research report. The report states that there are three key components driving cooperation:
- Russia’s desire to develop its East Siberia mineral and hydrocarbon reserves.
- Russia adjusting to the new realities of the European gas market.
- China’s precipitous demand growth over the last decade.
‘Historically there has been very limited energy trade with China, as Russia has focused on large West Siberian resources and European markets. Fears of increased Chinese economic and demographic influence have traditionally limited Russia’s willingness to open East Siberia up to direct Chinese investment. Instead, loans for long term supply have characterised trade between the two countries. Therefore the recent offer of equity in Arctic and East Siberian acreage and CNPC’s 20% farm in to Yamal LNG mark a significant breakthrough. Together, with upfront financing in return for guaranteed supplies, a model for increase cooperation appears to be emerging,’ said Paul McConnell, Senior Global Horizons Analyst for Wood Mackenzie.
Russia’s pivot east
A Wood Mackenzie report called ‘Russia’s pivot east: the growth in energy trade with China,’ points out three key drivers behind this wider political alignment between the two countries. Ian Thom, Head of Russia Upstream Research commented, ‘as legacy West Siberian oil production declines, Russia is undergoing a period of renewed interest in exploring and developing the energy resources of its Far East and East Siberia regions. These key provinces are sparsely populated, highly resource rich and adjacent to a large and resource hungry Chinese population, and their development is a major priority for the Russian government. Exploiting the mineral and hydrocarbon wealth of the Far East and East Siberia allows Russia to diversify markets, maintain energy production levels, develop industry and increase local incomes.’
The report says that Russia’s oil sector is leading the way and East Siberia is becoming a major producing region. Simultaneously, Russia is being forced to accommodate the new realities of the European gas market. McConnell expanded, ‘as a result of the North American shale gas revolution, Qatari LNG cargoes have been diverted to Europe, where gas demand has been effectively stagnant since the Global financial crisis. As a result, Russia has reduced its target price for gas into Europe and is seeking alternative markets for new supply.’
McConnel added, ‘the Russia-China energy relationship is very different to the one that exists between Russia and its traditional market of Europe. The latter operates in an established legal context, features commercial arrangement with a variety of state owned and private companies across a number of countries, and has a track record of many decades. In contrast, there is a very short history of energy trade between Russia and China. Now, a wider political realignment is underway, reversing the historical trend of limited engagement between China and Russia. CNPC has acquired a 20% stake in Yamal LNG and will purchase at least 3 million tpy of LNG. Chinese support is a crucial step in building a broad based financial platform for the project.’
Progress has been made with oil trade between the two countries; however, gas exports have been 20 ears in negotiation. A MoU was signed in March 2013 for 38 billion m3 of supply from Russia’s East Siberia gas fields, with first delivery scheduled for 2018. Gas developments are on hold until the pipeline agreement and gas sales contract is finalised.
Wood Mackenzie has warned that negotiating the future terms of cooperation between Russian and Chinese companies will be challenging. ‘Remarkable progress has been made since the ESPO spur to China was agreed in 2009, but negotiating the future terms of cooperation between Russian and Chinese companies will be challenging. If large projects are to be realised, Russia may have to allow deeper Chinese involvement, for which there is little historical precedent,’ offered Thom.
The report concludes that both Russia and China have strong incentives to access new sources of growth and to develop new energy trade routes; ‘We expect further investment from China in LNG, gas pipelines and gas processing, and in power generation and transmission capacity. Russia’s proximity, the quality and scale of its eastern resource base, and the new willingness of its energy companies to trade, could make it China’s most important single energy supplier for some decades to come,’ ended McConnell.
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