The geopolitics of the Russian-Chinese gas deal

TOLGA DEMİRYOL

Russia’s Gazprom and China National Petroleum Corp (CNPC) signed a $400 billion gas deal on May 21. What are the broader geopolitical implications of this historic agreement? What do Russia and China expect to gain and how will the United States respond?

The gas deal had been in the making for a decade as Russia and China negotiated over price and other terms of the contract, including the route of the pipeline that would carry the gas from Siberian fields to China. The final price is still unclear, but it is believed that China agreed to a large upfront payment to cover initial costs. The projected delivery date is 2018, with an ultimate capacity of 38 billion cubic meters (bcm).

Access to the Chinese energy market is at the core of Russia’s “pivot to Asia.” Europe has been Russia’s primary market, but European energy consumption is stagnant and the EU no longer appears willing to bear the political costs of its dependence on Russian gas, particularly after the Crimea crisis.

Diversification of the energy mix and import routes is thus the EU’s priority. Trans-Anatolian and Trans-Adriatic pipelines will bring in gas from the Caspian basin to Europe, bypassing Russia. The EU’s diversification efforts are being aided by the shale revolution in the U.S., which has given Europeans new options. Most of the surplus cheap American coal is now headed to Europe. Liquefied natural gas (LNG) imports from the U.S. are still an expensive option for the EU in comparison to piped gas. Yet, given the geopolitical climate after Crimea, it is possible that some American LNG will find its way to European markets. The conclusion of the Transatlantic Trade and Investment Partnership (TTIP) will also likely boost the U.S.-EU energy trade. Given the deteriorating position in Europe, access to Chinese market has become even more critical for Russia. 

China, too, stands to reap extensive economic gains from the gas deal. For reasons of costs and environmental sustainability, China has made natural gas its top priority in its Twelfth Five Year Plan (2011-2015). Chinese demand for gas is growing fast, projected to reach 230 bcm per year. China has vast unconventional gas reserves but they are not recoverable in the near future. Thus, reliable gas imports are critical. China is weary of LNG imports, not only due to the high cost, but also because of Beijing’s desire to avoid relying too much on the U.S.-dominated sea-lanes as well as the politically unstable suppliers in the Middle East and Central Asia. Russian gas is the best option for China, politically as well as commercially.

When it comes to the geopolitical implications of the Russian-Chinese gas deal, two questions stand out.

First, will the gas deal pave the way for a closer political partnership between Russia and China, perhaps even a strategic alliance to challenge the global primacy of the U.S.? While the energy-fueled economic interdependence will facilitate some cooperation between Russia and China, a full-fledged political alliance with revisionist goals appears a distant possibility. From the geopolitical perspective, Russia will likely remain suspicious of China’s intentions to establish regional hegemony in the Pacific. China is highly unlikely to look favorably upon Russian efforts to cooperate closely with India and the Koreas.

Second, how will the historic gas deal affect the competition unfolding between Russia and the U.S. in Asia? Given the current LNG prices, the U.S. is currently at a disadvantage. In order to compete with Russian gas, the U.S. will need to reduce LNG prices. The price of natural gas in Asia is indexed to oil. In order to facilitate gas-to-gas competition and perhaps even establish a gas-trading hub, the U.S. will need to work closely with Asian governments, including China, Japan and South Korea. With the Russian-Chinese deal completed, Korea and India will be the next battlefields for the U.S. and Russia.

Russia is planning a $30 billion oil pipeline to India, which is projected to become the major market for Russian oil exports (Russian revenue from oil exports dwarf the revenue from gas). Gazprom is also working toward building a natural gas transport network to South Korea via the North. In April 2014, Moscow wrote off 90 percent of Pyongyang’s debt toward that goal. If the projects with China, India and Koreas are realized, Russia will be the primary energy supplier of the world’s largest economies after the U.S. To counter the Russian offensive in Asia, the U.S. needs a strategy that takes advantage of its extensive alliances in the region.

The Russian-Chinese gas deal is indeed a historic development, not only due to its huge price tag but also because it marks the first major act of what will likely be a long conflict between Russia and the U.S. in Asia.

*Tolga Demiryol is a professor at Istanbul Kemerburgaz University.