[NGW Magazine] China, Russia and the US: the eternal triangle

The Russia/China relationship, including those parts relating to gas, belong in a broad framework. China and Russia negotiated the construction of the Trans-Siberian gas line for decades, for example, and yet not much happened for a long time because Moscow had demanded prices to which Beijing did not agree. At the same time, Moscow’s refusal to give in could well be explained by the Kremlin’s continuous gravitation toward the West – despite signs of defiance, as was demonstrated by Putin’s Munich speech in 2007 and the conflict in Georgia in 2008.

The Sochi Olympics in 2014 were designed, in many ways, to demonstrate that Russia is a country of rich history and culture, and implicitly connected with the West. China was not happy with these trends, for Moscow’s good connections with the West implied that Russia could find most of the markets in Europe, and European capitals implicitly sent the message to Moscow that this was indeed the case, and that Europe needed Russian gas.

Indeed, the first, 55bn m³/yr Nord Stream line to deliver Russian gas directly to western Europe, was built without much protest or pressure. By 2014, however, the situation had changed abruptly. After the crisis in Ukraine, Russia’s relationship with the West deteriorated sharply, and the Western direction became questionable. At that point, the Kremlin became ready to compromise with Beijing, and an agreement was immediately clinched with China to build the 38bn m³/yr Power of Siberia.

The agreement was not too profitable, as indicated by the fact that Gazprom CEO Alexei Miller refused to disclose the price arrangements, and the assessment of some observers, albeit he later stated that Power of Siberia would definitely be profitable. China clearly benefited from Russia’s tensions with the West.

The situation became more favourable for China/US gas co-operation when Xi Jinping, China’s leader, and Donald Trump agreed on the Alaska deal, according to which China would invest in Alaskan gas production. China would also be the major gas offtaker. But recent events provided some relief for Russia – or at least complicated the picture. But the China/US rapprochement has given way to mounting tensions that could improve the chances of Russia delivering more gas to China.

China/US tension and the fate of the Alaska deal

Russia remains under Western sanctions, which have grown harsher and could still create insurmountable problems for Nord Stream 2; still, the reversal of the project has become increasingly unlikely, albeit not absolutely impossible if Denmark continues to block construction.

At the same time, problems have emerged in China-America relationships. The US imposed tariffs on Chinese goods. China reciprocated and there is the potential for a full-blown trade war, with unpredictable results. One should remember here that the trade war has much broader implications. China increasingly looms large in the minds of American politicians as the US’s major enemy in the not-so-distant future. Some American pundits believe that open conflict between the US and China is inevitable, owing to what is called Thucydides’ Trap.

This theory, invented by an American academic, was named after the ancient Greek historian who explained the causes of the war between Athens and Sparta in 430 BC. It asserts that the rise of a new power will evoke fear in the established power that leads to open hostility between the two.

People in Beijing are aware of this theory and despite their statements that China’s rise will be peaceful, have hardly discarded the possibility of an open conflict with the US. And these considerations inevitably cast a shadow over the US/China gas deal. Indeed, there is the possibility that the US could either end LNG delivery or block its delivery from the sea.

In this scenario, Eurasian roots have become strategically viable and this is the reason why China is ready to reassess its view of Russian gas, especially that which will flow through the Power of Siberia. Beijing and Moscow are moving closer to one another because they face a common enemy. Russian observers noted that the US/China tensions could well have implications for the Alaska and other gas deals.

One observer noted that not only has China become one of the major customers for American gas, but Washington is anxious to increase delivery of American LNG to China. Still, the trade war could lead to taxes on American LNG, and some believe that delivery could be stopped completely. At the same time, Russian observers noted that tensions between Washington and Beijing provide Russia with the opportunity to fill a niche and ensure the delivery of gas to China.

China’s demand for gas and Russia’s opportunity

According to some Western reports, China has indeed experienced a severe gas shortage. “As China struggles with natural gas shortages, its pipeline system from central Asia is rapidly running out of capacity. Plans call for utilising more than 93% of the Central Asia-China Gas Pipeline (CAGP) system’s capacity this year with increased supplies from Turkmenistan, Uzbekistan and Kazakhstan to meet China’s needs,” according to Global LNG Monitor.

Russian observers have a variety of views as to what these shortages would entail. Some assumed that recent China-US tensions would have neither positive nor negative repercussions for Russia. Indeed, some Russian observers believed that China’s appetite for gas is so big that China would consume gas from all sources including Russia and the US.

Other observers believed that one should not exaggerate China’s needs for gas, because it has increased its own production. Still others noted competition for the Chinese market from central Asian countries such as Kazakhstan. At the same time, most Russian observers assumed that rising China-US tensions and China’s voracious appetite for gas would provide Russia with increasing opportunity to send gas to the Chinese market.

Russian observers acknowledged that Russian gas line gas could face some competition. Still, they discarded the notion that it could be too serious for Russia. The point here is that Turkmenistan, the major supplier of gas to China, actually has limited reserves, and the information about huge amount of Turkmenisant’s gas reserves does not mean much, as much of the near-term gas is earmarked for existing or new markets, not Europe.

In addition, gas production in Uzbekistan, another gas-rich country, is under Gazprom’s control and most of this gas is also sent to China.

Iran has considerable gas reserves. Still, due to the present-day international climate, the chances for Iran to be a true competitor should also not be exaggerated, despite increasing ties between Tehran and Beijing. Consequently, Russian observers have concluded that Russia is destined to play an important role in supplying China with basic fuels and especially gas: several articles in the Russian press have developed this argument.

Russian observers noted with satisfaction that China would need a lot of gas from abroad, including Russia; it has already experienced a serious gas shortage. According to Russian observers, only a few cities such as Shanghai have enough gas reserves. In addition, China’s increased emphasis on the environment would push gas demand even higher, and this would make China’s market practically bottomless.

At the same time, the northern provinces will be the first to benefit from the Power of Siberia, and they have already expanded the distribution network there, according to Chinese sources.

It was not surprising that Gazprom regarded China as its future and started to build an additional gas line to China even before signing contracts with potential Chinese consumers. It is also noted that China needs not just Russian gas, but increasingly Russian oil.

And this strategy of Gazprom and the oil companies fits perfectly into Russia’s geopolitical/economic orientation, which implies turning eastwards. China would make Gazprom much less dependent on European markets and Ukraine.

The role of LNG

The interest in Russian gas and growing certainty that the Power of Siberia will be built by 2019, as planned, do not mean that either Moscow or Beijing are anxious to consummate their geopolitical and related gas marriage completely. On one hand, the gas lines – both Power of Siberia and Nord Stream 2 – apparently provide a cheap and reliable way to send gas to global markets. But the lines tie Russia to a particular place and deprive it of flexibility. Consequently, Russia, while planning the other gas lines, has also been devoting considerable attention to LNG which it sees as equally important.

Russia’s first LNG cargo from Yamal arrived in China to the same fanfare that greeted the arrival of the first US cargos of LNG to Polish and Lithuanian ports. In the case of Russian LNG, both the Russian and Chinese high-ranking officials were present to underscore the importance of the event.

Russian observers noted that its LNG has definite advantages over LNG from other countries. It might be more expensive, but clearly is easily deliverable, coming without the assistance of an icebreaker and arriving in a week.

It is clear that Moscow has been heartened by China’s conflict with the US, which provides an additional reason for Beijing to see Russia as one of the most reliable suppliers. Still, Moscow has apparently learned from past experience, and understands that gas lines might be both a blessing and a curse.

On one hand, gas lines provide a stable market. On the other hand, they limit the flexibility of the seller, and this is why Moscow has been engaged in the LNG project. It is assumed here that in the case of the appearance of a more lucrative market, both in Asia and elsewhere, or some problem with China in the future, Russia will not suffer major losses. While Russia-China co-operation looks promising, its future will depend in many ways on the level of Beijing/Washington discord.