After almost a decade of haggling, Russian President Vladimir Putin and Chinese President Xi Jinping signed an agreement on Russian gas supplies to China in late May. The contracts stipulates Russia’s obligation to supply 38 billion cubic meters (bcm) of gas annually for 30 years through the planned Power of Siberia pipeline, starting 2018 from the Eastern Siberian Kovykhta and Chayanda gas fields. The project, including upstream and midstream infrastructure is estimate to cost about $75 billion, out of which $45 billion will be financed by the Chinese in direct investment and pre-payment for the gas. The value of gas sales throughout the contract is estimated to be up to $400 billion.
The deal made headlines in Europe and the United States in the context of the Ukraine-crisis and the ongoing standoff between Russia and the West. Many opined that it is more than an energy contract and heralds a new era of a close alliance between Russia and China, in defiance of the West. Others fear that because of the latest fallout and the actual and potential sanctions against Russia, Moscow is set to abandon Europe and ‘pivot’ towards Asia, threatening the energy security of the old continent.
In reality, though the gas deal indeed came handy to Putin amidst his growing isolation and will inevitably deepen the relationship between Russia and China, it will not threaten European energy security in any meaningful way, at least in the short- and medium-term.
The reasons are complex. First, Russia will use different sources to supply China than the ones it uses for domestic consumption and European export purposes. Encountering fierce resistance from Beijing, Moscow’s was already forced to drop its insistence to supply China from Western instead of Eastern Siberian fields, motivated by the intention to be able to play Europe against China in negotiations. Furthermore, there is no physical interconnection between the fields in the East and the West. Thus, the danger of diverting supplies is just not there.
Second, supplies won’t start until 2018 the earliest, and will even then represent only a fraction of what Gazprom exports to OECD Europe (162 bcm in 2013). Gazprom will remain financially dependent on European sales for the foreseeable future. While Russia will undoubtedly gain with the deal, it is no silver bullet in propping up Gazprom finances and Russian state coffers. The gas export revenues to China, while significant, will not be able to offset the underlying weakness of the Russian economy. Moreover, Moscow seems to have ended up with a reduced price – the sticking point for the negotiations for so long. Though the exact price formula remains secret, in all likelihood Putin had to make further concessions to get the deal now, so he could boast his political positions on the European front.
Third, Russia will have to compete against a whole range of other suppliers for the Chinese gas market, even if China’s appetite for gas seems insatiable. China is desperate to reduce its overreliance on coal and switch to gas to slash its emissions and clean up the air of its cities. Gas consumption is predicted to grow from the 167 bcm in 2013 to 545 bcm annually by 2035 according to the International Energy Agency. Yet China already has access to pipeline gas from other sources, including Central Asia and Myianmar, and liquefied natural gas (LNG) shipments primarily from the Middle East. Additional major sources will come online from Australia, East Africa, Canada and even the United States. Liberalization of the gas export regime of the latter is critical also to increase competition and hub-based pricing in Asia and thus weaken Russia’s clout there.
The long-term consequences of the deal for the West in general and European energy security in particular are harder to gauge. The agreement is another significant step in opening up Russia to Chinese investment and trade and could help sustain the Russian energy sector even if the West decides to adopt sectoral sanctions. As Chinese demand increases, there is room for expansion from the initial 38 bcm, resulting in Russia realizing a growing share of income from Asia. Rosneft and Novatek that have a growing share of gas production in Russia are also eyeing to supply the Chinese market with LNG and with the gradual opening up of the Arctic shipping route, arbitrage between Europe and Asia will become a more realistic proposition. Interestingly, and unusually for such a major international energy transaction, the May gas deal will be conducted in yuans and rubles, not US dollars. This signals the intention of both China and Russia to weaken the dollar’s hegemony in international energy trade, even though a rapid shift from a predominantly dollar-based international energy trading system seems a distant possibility for now.
All in all, despite Russian posturing, Moscow’s increasing focus on Asia is unlikely to become a primary concern for European gas-supply security yet. While gas trade with China will help sustain Gazprom and hence Putin’s regime, Russia will not be in a position to bank exclusively on Asia and abandon Europe. Nevertheless the West should closely watch the developing Russo-Chinese energy relationship as its long-term political and security consequences could be profound.
David Koranyi is the deputy director of the Atlantic Council’s Dinu Patriciu Eurasia Center in Washington DC.