China and Russia Finally Tie the Knot

While US energy is mired in silly, ideologically imbued debates from the moratorium on offshore drilling to the outright preposterous environmentalists’ arguments on hydraulic fracturing for natural gas, China and Russia initiated a geopolitical energy deal that will resonate for decades.

During the last week in September Chinese President Hu Jintao and Russian President Dmitry Medvedev inaugurated a new pipeline that would allow Russian oil to be shipped to China which, not unrelated, just surpassed the United States for the first time in total energy consumption.

The new pipeline is a southern spur of the massive West Siberia-Pacific Coast pipeline system, currently under construction in Russia with a lot of Chinese financial support. The recently completed pipeline which, in true Chinese can-do attitude, was built in record time, connects Skovorodino in East Siberia with Daqing in China, site of China’s largest but declining oil field and the beginning of its pipeline infrastructure. The new pipeline was built by the Russian oil transport monopoly Transneft and China’s largest oil company, CNPC.

The pipeline is supposed to ship 15 million tons of oil per year (300,000 barrels per day) and, even before oil started flowing China already requested to double the shipments to 30 million tons per year. The Chinese request for more oil is not likely to be met any time soon because at the oil prices since the economic crisis, East Siberian oil-field developments have not materialized. They were supposed to provide much of the would-be oil to China.

Until the pipeline was built Russia was exporting oil to China by far less efficient and environmentally harmful trucks. In 2009 Russia exported about 180,000 barrels of oil per day to China, 4.4 percent of the country’s total imports of 4.08 million barrels per day, which amounted to more than 50 percent of Chinese demand. The new oil shipments will increase Russia’s share of Chinese oil imports to over 11 percent. This is bound to increase in the future.

Even more significant is another massive energy deal signed by CNPC and Gazprom, the gargantuan Russian gas monopoly, to ship 30 billion cubic meters of natural gas per year (about 3 billion cubic feet per day) for 30 years, starting in 2015. This volume of gas will dwarf any current imports and will account for at least 50 percent of China’s expected shortfall in demand above projected domestic production by 2015. It will make an enormous impact on China’s efforts to increase its natural gas supply. China needs all the energy sources it can get to combat the insidious pollution caused by the burning of coal for power generation-still contributing a primitive 70 percent of China’s primary energy mix.

There is another underlying reason for the new energy cooperation. It is not just the obvious Chinese demand. Russia, after two years of economic crisis that brought a collapse in natural gas prices and a significant drop in oil prices, is far less arrogant than it was during the Presidency of Vladimir Putin. At $150 oil, Putin was a 1000-pound gorilla; at lower prices Russia is far more agreeable to compromise and far more willing to export to its largest future client.

The Russia-China energy deals, in another era, would arguably be considered the largest geopolitical events of the year, bringing together energy rich superpower Russia with the undeniably emerging economic super-power, but energy deficient, China. It is a sign of the times and the misplaced national priorities that the news barely received minimum inside page coverage, if at all, in the United States.

Energy Tribune