Wednesday, 26 June 2013

Sino-Russian energy deal creates important opportunities

After years of negotiations, one of the largest energy deals in the history of the world’s oil industry occurred this week between Russian energy giant Rosneft and the China National Petroleum Corporation (CNPC). The $US270 billion agreement will secure energy supply and demand needs for both Moscow and Beijing, and points to a mutually beneficial relationship for the two warming Asian heavyweights.

The deal will employ the mostly completed Eastern Siberia-Pacific Ocean oil pipeline. This pipeline will allow Russia to deliver 2.1 million barrels of oil to the Pacific Ocean at ports in Vladivostok, Sakhalin I, and Tianjin.
Russian leader Vladimir Putin said Rosneft will
supply hundreds of millions of tons of crude oil to China

Rosneft will supply CNPC an enormous 365 million metric tons of crude oil over the next 25 years. Currently taking deliveries of around 300,000 barrels per day (bpd), China is set to double those shipments to 600,000 bpd pumped by 2015. Also, during the St. Petersburg Economic Forum where the recent deal was finalised, Beijing intimated an expansion of the 600,000 bpd is expected in the future as well.

Aside from the gigantic oil shipment figures and the enormous worth of the agreement, the deal is geopolitically significant for both Russia and China. The Asia region only accounted for roughly 4 percent of Russian oil exports in 2005, but those deliveries are expected to rise to 30 percent by 2015, according to Rosneft spokespeople, as the recent deal and others come online.

For Rosneft, in great need of financing, an upfront payment of $US70 billion from CNPC makes this agreement very welcome. On the homefront the deal will go a long way to increase Rosneft’s political influence and help pull it from beneath the giant shadow of fellow-Russian energy firm Gazprom.

Russian energy firm competition is one reason for the increasing emphasis on selling Russian oil and natural gas to the Asia Pacific region, but that is not the full picture. Moscow, which still maintains a close eye on Russian energy firms, has a great incentive to diversify its energy export portfolio.

Presently, Europe is by far the largest consumer of Russian energy, accounting for over 78 percent of yearly export totals. Although those numbers have not yet dropped appreciably, the development of indigenous energy fields in Ukraine and other Eastern European countries will help those countries lessen their reliance on Russia for their energy needs.

Also, energy fields being developed in the United States could offer Western European countries a viable second option for their energy consumption, both of which will have a profound effect on Russian exports.

Since Russia relies heavily on its energy exports to keep their cash flow high, Moscow is preparing for the possibility that continued diversification of European energy imports and a dangerously imbalanced European economy might create an insurmountable obstacle in the short to medium term.

In this fragile environment, Moscow is looking east.

Chinese cities are swelling, especially deeper into the Chinese mainland. As Beijing looks to expand its focus away from coastal regions - where much of its past economic growth has occurred – and toward the rural underdeveloped interior provinces, it will need greater amounts of energy.

Russian President Vladimir Putin (L) and Chinese
Executive Vice Premier Zhang Gaoli at
St Petersburg International
Economic Forum - AFP/Pool/Dmitry Lovetsky
Alongside the inland urbanisation project, Beijing is interested in increasing its domestic consumption rates to offset the decline in low-cost goods orders to Western countries and to ensure a growing section of middle-class Chinese are supported. Prompting urban growth is a central aspect of Beijing’s efforts.

All this requires energy, and Beijing is acutely aware of the obstacles presently blocking its attempts to secure reliable energy supplies from further afield in Africa, South Asia, and the greater Asia Pacific. Moving closer to Russia is a strategic decision, but it will also help ease the tension between the two countries over China’s determined pursuit of new sources of oil in Central Asia.

China has welcomed the possibility for increased Russian energy deliveries to feed its own rapidly growing economy. Getting closer to Moscow might require bending to Russian influence in the contested Central Asia region, but the prospect of continued, reliable, and profitable energy shipments is simply too great a chance to pass up for Beijing.

Moscow understands that China’s appetite for energy will only increase in the years to come. China is expected to see a 75 percent increase of its crude oil imports by 2035. By positioning its own energy firms to supply China with the oil it needs, Moscow is protecting its bank account health and its influence over Former Soviet Union states, an influence which might have been challenged by Beijing in the future.  

China too will breathe a sigh of relief this week as the deal moves through the stages of finalisation. Now that it has secured a reliable flow of oil from deep Russian reserves, the Chinese government’s many domestic projects can now be given more attention.

While this deal was signed, bilateral trade between Russia and China is expected to reach $US100 billion by 2015. As the two countries find more reasons to draw closer together, they will have to ensure their economic futures do not become overly reliant on each other.

Russia could have all the energy China needs tucked away in its vast fields of Siberian oil and natural gas. But it is far from certain yet that Russia possesses the long-term political or physical ability to deliver that energy, and equally uncertain that China will continue to grow fast enough to fund the enormous quantities of oil requested for delivery.

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