The Power of Siberia

Deepening China-Russia Partnership

Magazine Desk

December 2nd was a notable day in the strategic relationship between Beijing and Moscow, which saw the first shipments of Russian natural gas to China via the much-awaited Power of Siberia pipeline.  The $55 billion project is Russia’s most significant energy undertaking since the collapse of the Soviet Union, part of a larger $400 billion deal to supply China with 38 billion cubic meters of natural gas (bcm) per year for 30 years. Pressure from Western sanctions – brought on by Russia’s illegal 2014 annexation of Crimea – is accelerating the Kremlin’s pivot away from the European Union towards the energy hungry East. The 1,800 mile pipeline is a hedge against a potentially shrinking market in Europe, where souring diplomatic relations and rapid penetration of renewables threatens the appetite for Russia’s oil and natural gas in the long-run.

Russia is pivoting its energy business to the east. The world’s largest exporter of natural gas has built an enormous pipeline running from Siberia to the Chinese border to feed China’s insatiable energy appetite. The new conduit, called the ‘Power of Siberia’, is part of a plan by Russian President Vladimir Putin to reduce his country’s dependence on gas markets in Europe and tap into the fast-growing economies of Asia. For China, whose domestic energy production can’t keep up with demand, the pipeline offers a vital new source of supply.

Russia possesses 20 percent of global natural gas reserves and accounts for 17.3 percent of the world’s gas production; it is the world’s largest natural gas exporter. Historically, it has sent that product west: Russian exports account for about 21 percent of Europe’s gas pipeline imports. Since it annexed Crimea in 2014, a move that triggered sanctions and intense scrutiny of any reliance on Russia for critical supplies, Moscow has sought to diversify its export destinations to reduce vulnerability to the loss of any of those markets.

Asia has been the obvious alternative, and China is the preferred customer. China’s appetite for gas has grown 33 percent in the last two years, it is anticipated to account for 40 percent of the increase in global gas demand until 2024, and it is (relatively) close to underdeveloped gas fields in the north and east of Russia. That logic pushed the two governments to conclude in 2014 a 30-year, $400 billion gas supply contract, the largest in the history of Russia’s gas industry. Rollout will be gradual, with gas flow in the Power of Siberia reaching 4.6 billion cubic meters next year, but more than doubling to 10 billion cubic meters by 2021. Eventually, flow will reach 38 billion cubic meters a year, about 20 percent of China’s annual liquefied natural gas imports.

The energy partnership has implications for Japan. First, there is its impact on global energy markets. Russian gas is cheaper than that from other suppliers, which will lower global prices and reroute trade; Australia, a traditional supplier of China, will likely lose business. In the longer term, Japan will benefit too, but it buys gas in long-term contracts, many of which were signed before the price of liquefied natural gas fell 43 percent over the past year as the global economy has slowed. A weak market will undercut efforts to develop natural gas projects elsewhere in the world, such as a project in Australia that Tokyo Gas has joined.

The second dimension is strategic. The most important consideration that draws together Beijing and Moscow is a shared desire to increase their power in global affairs and to undercut the influence of the United States and its ability to thwart their ambitions. Chinese President Xi Jinping made plain their thinking last summer, when he noted that “this year the United States and some other Western countries have increased their interference in the internal affairs of China and Russia, threatened the sovereign security of the two countries, and impeded their economic and social development.”

Xi explained that the Power of Siberia is “the start of a new stage of our cooperation,” a view shared by Russian President Vladimir Putin. He said that the pipeline “takes Russo-Chinese strategic cooperation in energy to a qualitative new level.” This is part of an “all-encompassing partnership and strategic cooperation [which is] entering a new epoch.” The two countries are discussing Power of Siberia 2, which will deliver another 30 billion cubic meters of gas to China and another smaller pipeline from Sakhalin. China already has interests in Russia’s Arctic gas projects and has been receiving oil via a Russian pipeline for several years

Energy is just one expression of this partnership. Two-way trade continues to grow and is expected to meet the target of $200 billion per year soon. The two countries now hold joint military exercises with increasing frequency; their first joint air patrol occurred in July, an event that triggered both Japanese and South Korean air defences.

Japan has long courted Russia in an attempt to settle the dispute over the Northern Territories, islands off Hokkaido seized from Tokyo by the Soviet Union at the end of World War II, and to ensure that Moscow has strategic options other than closer ties with Beijing. Japan has invested in energy development projects in Russia’s Far East to gain access to those resources and to develop some influence over Russian thinking. Those efforts have had limited effect since, ultimately, Russia, or at least Putin, sees more convergence in thinking between himself and Xi than between himself and decision-makers in Tokyo. That assessment will continue as long as Russia considers itself a revisionist state, eager to recalibrate the global order. That is the cornerstone of the China-Russia partnership, one fuelled as much by grievance as by energy resources.

Why does China want the Power of Siberia?

China is the world’s biggest energy consumer and importer. Russian gas will supplement output from China’s domestic fields and could be cheaper than LNG arriving in tankers. The two countries are already talking about a second link, known as Power of Siberia 2, which would serve the industrial areas on China’s east coast. China also operates the Central Asia-China Gas Pipeline, which brings gas mainly from Turkmenistan through Uzbekistan and Kazakhstan. Putin expects “colossal” growth in China’s energy needs will require more pipeline and LNG capacity, benefiting both Gazprom and Novatek PJSC, which is developing LNG on the Yamal peninsula in the Kara Sea.

Why is it important to Russia?

The Power of Siberia provides a hedge against deteriorating relations with Europe. Until now, most of Russia’s gas production has gone west, much of it through pipelines in Ukraine. (Some volumes also travel by tanker in the form of liquefied natural gas, produced on the Yamal peninsula in northern Siberia and on Sakhalin island near Japan.) Russia and Ukraine have bickered for years over the transit fees, and on two occasions Russia turned off the gas in the middle of the winter. The political relationship between Russia and Europe has also become increasingly fraught since Russia seized Crimea in 2014 and the US and Europe responded with sanctions. Meanwhile, Russia has vast untapped reserves of gas in its far east that are closer to China than to Europe.