WHERE THE INTERESTS OF TWO NATIONS CONVERGE: THE RUSSIAN AND CHINESE ENERGY DIALOGUE
In 1992, the Russian and Chinese leaderships decided to start their relations with a clean slate by signing an inter-government agreement which established the principles of trade and economic cooperation. The ideas of cooperation in the energy sector came almost right after that.
Back in 1994, the Russian company YUKOS proposed a project of the pipeline Angarsk – Datsin which would be used for the supply of Russian oil to China. However the project was not destined to come to life, just like almost all Russian and Chinese energy initiatives in the 1990s. Firstly, the Chinese regarded Russia at that time as an unreliable partner that could not even control its own territory. Secondly, China barely needed our resources back then. It is peculiar to call to mind the fact that in 1994 China imported a piteous 2.9 million tons of oil per annum, which accounted for less than 2% of consumption.
By the end of the 1990s, the situation in China had undergone significant change. A tremendous economic growth made China independent on the import of energy carriers, primarily from the Middle East which at that time was a more stable region than it is now, but still not the safest place for business. Although shortly thereafter there occurred an event which forced China to search for an alternative to Middle East oil. The Twin Towers of the World Trade Center in New York collapsed on September 11, 2001, and a lengthy period of instability began in the Middle East. In the meantime Russia started to feel a growing force of its energy policy: Russia was becoming more and more stable, richer, increased its recovery of energy carriers which started to increase in prices very rapidly. It was necessary to seize the moment – to diversify the sales markets, to boost supplies and to construct an infrastructure. But even then, despite the desire of both parties, cooperation failed to get traction since the distrust that existed between the partners was too great.
The projects of oil and gas pipelines from Eastern Siberia to China would spring up with amazing frequency until the middle of the 1990s. Inter-government committees were involved in their development, various agreements and memorandums officially set sights on the laying of those pipelines, but the wheels were set in motion only in 2006. During Vladimir Putin’s visit to China a memorandum of understanding was signed which provided for the supply of a grandiose 68 billion cubic meters of gas per annum. It was a thoroughly detailed agreement which allowed for the construction of storage facilities, gas distribution systems and cooperation at all stages – from geological exploration and recovery to gas transportation and sale. An agreement on the supply of oil – 20 million tons per annum – was also reached at that time. The oil pipeline Angarsk – Datsin, which had been the centerpiece of negotiations since 1994, was ultimately consigned to the ash-heap of history, and was replaced by a new project which was part of the oil pipeline Eastern Siberia – Pacific Ocean (ESPO).
The breakthrough was possible due to the rapprochement and compromise of both parties, each of which was ready to make concessions for the sake of supply diversification. The Chinese, who always wanted to gain access to Russian fields, could count upon a certain compensation for its failure with Slavneft – Sinopec was given an opportunity to participate in the purchase of the assets of Udmurtneft jointly with Rosneft. As a result, the ownership interests of the Russian and the Chinese parties in them were 51% and 49%, respectively. It was the first Chinese strategic investment in recovery assets in the territory of Russia.
At that time, in the summer of 2006, during the initial public offering of Rosneft, CNCP managed to purchase its shares for 500 million USD. The transaction was not that large-scale by standards of these two oil giants, but nevertheless it was very symbolic, so much the more as it heralded a new level of trust in the relations. The two companies established a joint production Vostok-Energy (Rosneft – 51%, CNPC – 49%) in the territory of Russia which obtained a license for two fields in Irkutsk Oblast. And next year the partners established a joint production Chinese Russian Eastern Petrochemical Company (with the ownership interests now being in reverse: the Russian company – 49%, the Chinese company – 51%) now in China. It had to be engaged in the construction of an oil refinery in Tianjin with the capacity of 15 million tons per annum. In that same 2007 Rosneft and Sinopec entered into a shareholder and operating agreement on the joint activity in the field of exploration and development of the Veninsky block of fields in the offshore area of Sakhalin Island (Sakhalin 3 project). The Chinese partners had a 25.1% ownership interest in the project.
But memorandums of understanding, be they thoroughly detailed or not, do not constitute an agreement. And the bargaining took a long time. China tried to expand its influence and gain the most favorable conditions in every possible way. It occupied an advantageous position: after the 2007-2008 crisis, the access of Russian companies to global capital markets was limited. And the Chinese which possessed vast resources could come to the rescue in this matter. Russian companies required resources in order to implement the signed agreements on the supply of oil since they were called to build an enormous infrastructure before it could generate any profit. The China Development Bank issued loans to Rosneft and Transneft, which were constructing the pipeline, in the amount of 15 billion USD and 10 billion USD, respectively. And a branch from the ESPO to Datsin was constructed in 2010. In 2013, it was resolved to expand supplies up to 30 million tons per annum and even more (it would yield a profit of approximately 270 billion USD to Russia over 25 years). There was concluded yet another agreement at that time – this time with Sinopec – on the supply of 100 million tons within 10 years.
It was more complicated with the gas agreement. 10 years had passed since the initial negotiations in 2004 before the parties entered into the bargain of the decade which provided for the supply of gas to China for 400 billion USD. The agreement was signed only when Russia was in desperate need of supplies to Western Europe due to a sharp escalation of the foreign policy situation. And the gas price for China was never mentioned by the officials which gave cause for gossips that the Chinese forced through their price by taking advantage of the circumstances. However, judging by available indirect data, the price did not drop below 350 USD for a thousand cubic meters which the Russian counterparts considered to be the red line. And the concession made by Russia more or less centered around state finances and regulation (in particular, the project would be released from the obligation to pay severance taxes to the budget), and the financial burden related to the construction of the pipeline. The Chinese counterpart would appropriate 25 billion USD for construction in advance. In such a case, the total volume of expenses was planned to be around 55 billion USD, while there has recently been talk of 70 billion USD. It is a very heavy load for Gasprom.
In any case, the construction of the gas pipeline titled the Power of Siberia began in the September of 2014. And it provides for the setting up of capacities which are much more extensive than the preliminary agreed ones – 38 billion cubic meters (the Russian counterpart hopes to increase the pipeline’s capacities up to 61 billion cubic meters per annum). Negotiations about the conditions of sale of these additional 23 billion cubic meters are yet to be held.