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What does the Russia-China gas deal mean for transportation?

Russia's new deal with China will see it provide gas from Western Siberia, in a move that could ultimately result in China becoming the largest recipient of Russia's gas reserves.

The agreement itself marks a major step in President Vladimir Putin’s bid to foster a closer energy relationship with China, particularly in the face of uncertainty in the west, but a great deal of interest is focused on the transportation aspect.

For some time, Russia has been aiming to broaden its export horizons and reduce its dependence on Europe as its only major customer, while at the same time China has been keen to minimise the risks associated with its energy imports.

At the moment, most of China's energy resources are imported via the Pacific, which is affected by the US military presence, but the new gas deal with Russia will allow China to counter any potential hazards.

The deal itself was signed by Mr Putin and his Chinese counterpart Xi Jinping ahead of the Apec summit in Beijing, and will see the Kremlin-controlled Gazprom supply Chinese state oil company CNPC with around 30 billion cubic metres of gas per year.

This will be in addition to a $400 billion agreement signed in May, which will see Russia sell 38 billion cubic metres of gas a year to China from yet-to-be-developed fields in the remote tundra of eastern Siberia.

New plans

Early details released by Gazprom suggest that the western gas pipeline would cross the narrow border in China’s far western region of Xinjiang, contrary to early indications that it would traverse the longer route through Kazakhstan or Mongolia.

The former route would have allowed Kazakhstan to purchase up to a third of the gas, which would address concern from China about finding a market for all of the contracted gas, but was opposed by locals who were reticent to become dependent on their larger neighbour for energy

Meanwhile, the latter route through Mongolia was eagerly sought by Ulan Bator, with Russia previously supporting building pipelines to China through Mongolia, but China blocked the proposal.

Lately, Gazprom has accelerated the pace of its collaboration with Chinese partners, with the construction of the Power of Siberia - the world's biggest pipeline, which will deliver gas through the eastern route - being carried out at full speed.

Lengthy negotiations

The Russian Energy Ministry itself noted that negotiations on the western route through Altai have been going on since 2010, but then emphasis was given to the eastern route, since the main consumers are located in eastern China and the demand is greater there.

It was also noted that China's use of gas is constantly increasing, with the country set to move from 470 to 930 billion cubic metres next year.

There is also the possibility of supplying up to 100 billion cubic meters of gas annually through the western route, according to Alexei Miller, chief executive of Gazprom, who said the western route is becoming a "priority project" in its gas co-operation and may even be launched sooner than the eastern one, due to the available pipelines and infrastructure.

He added: "Taking into account the increase in gas supplies along the western route, the overall volumes of gas exported to China might exceed supplies to Europe in the medium term."

"The western corridor is united by a single gas transportation system and by the main deposits in Western Siberia - that is, the resource base already exists," the ministry added.

Work needed

Still, Gazprom still has to modernise the existing gas transportation infrastructure and construct a gas pipeline to the Chinese border, which will pass through rather complicated terrain.

Investments in the Altai gas pipeline are estimated at between $11 and 14 billion, with some analysts believing that Russia may freeze the expensive projects concerning the construction of gas pipelines and gas liquefaction that are oriented towards western consumers, due to there not being enough resources to simultaneously realise several large projects.

However, the Energy Ministry has reiterated that there is "no probability" of rejecting projects, with Russia remaining a "reliable supplier" of gas to Europe, despite the establishment of trade and economic relations with the Asian-Pacific countries.

As Western Siberia is equidistant from mainland Europe and Asia, the gas produced and moved along the pipelines could easily be shipped to whichever market offered the most lucrative arrangement terms, though as Russia and China have discussed the western route for many years, the new deal is simply another step in a lengthy process.

Not only might the negotiations not result in a commercial deal, but Europe is expected to remain Russia's largest export market for gas, at least for the foreseeable future; something highlighted by it providing Europe with 160 billion cubic metres of gas last year.

Mutual interest

From China's perspective, one of the most attractive things about Russian gas is the fact that it can be transported overland.

Most of China’s energy resources are imported via sea through the Pacific, but this route is encumbered slightly by the American military presence in the Pacific, while there are other territorial disputes between China and Japan and various other countries in the East China Sea and in the South China Sea.

By strengthening energy ties with Russia, China can not only help to secure its gas imports, but also avoid the most dangerous maritime route.

For now, it remains to be seen how economically advantageous projects supplying gas to China may turn out to be for Russia, with the western route pipeline taking around 5,000 miles to reach China's economically developed regions, but Western Siberian gas only being competitive in terms of transportation costs at around 3,000 miles or less.

Also, it is important to note that the gas market is continually developing in Europe, with expected volumes of supplies through the eastern and western routes to China being almost half those projected to be moved to China over the next five years.

Nevertheless, it is the latest move from Russia to secure its energy future and strengthen global ties, which can only bode well for the country's oil and gas prospects.


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MIOGE 2018

18-21 June, 2018
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MOSCOW, RUSSIA
Venue: CROCUS EXHIBITION CENTRE

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