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Russia to close deal with energy hungry China

15 October 2009

Following the global economic crisis, Russia has still not fully recovered, yet China’s appetite for natural resources has not waned. A strengthening of trade links between the two nations could therefore be mutually beneficial.

Russia to close deal with energy hungry China
Russia to close deal with energy hungry China

Resource-rich Russia and energy-hungry China have reached an understanding on a huge energy deal which could ensure a steady flow of natural gas to Beijing, to support its economic growth and ensure that Moscow has a vast new market for its natural gas empire. It is predicted they could sign a final pact June 2010, with Russia starting to supply China with 10 to 15 cubic metres of gas around 2014 or 2015.

Russia has signed dozens of commercial pacts worth $3.5 billion and set the framework for a separate, multibillion-dollar agreement to build two natural gas pipelines to China from gas fields in Russia's Far East. Together, those pipelines would be capable of supplying China with 68 billion cubic meters of natural gas annually, representing 85% of the gas China currently consumes. Once Russia’s Gazprom and the China National Petroleum Company agree on a final price and the pipelines are built, China could become Russia's single biggest customer for natural gas, overtaking Germany, which imported around 37 billion cubic metres last year.

Gas is not the only energy source Russia can offer its neighbour. China has agreed to use Russian expertise to construct two additional reactors at its Tianwan nuclear plant. Russia has also started selling electricity to China from its Far East region. Coal exports to the country will total at least $1 billion by the end of the year.

The agreement between Russia and China highlights the determination of both nations to diversify their economies and seek new customers and vendors. It also reflects a political desire by both to steer a course independent of Western powers and especially the United States. China wants to see Russia as a counterweight to American influence in the region.

Russia is much keener to progress than China. China already produces about 76 billion cubic meters of natural gas each year, and only consumes about 80 billion cubic meters, with most of the rest coming from Australia as liquefied natural gas. So there are no gas shortages.

Furthermore, Beijing is gradually replacing coal and other energy sources with cleaner-burning gas, meaning China can afford to take its time in negotiating gas deals. However, China’s appetite for natural resources is likely to increase as economic and populating growth continues, so securing a large energy supply now is imperative.

Russia should not over-rely on any one relationship, and hence is not putting all its hopes in China. Russia has two big western-bound pipeline projects: Nord Stream, a joint venture with the Germans; and South Stream, a partnership with the Italians. Russia has also invited France’s EDF, the state-owned electricity giant, to take up to 10% of the South Stream project. And EDF’s competitor Suez-GDF intends to invest in Nord Stream.

Russia wants to persuade Europeans they don’t need Nabucco, their own proposed but problematic pipeline. Fears about the security of Russian gas supplies increased after the Georgia war in 2008, then the Russian dispute with Ukraine a few months later. Some Europeans think Russia is the risk. However, the risk could be in the route – the current one, running through Ukraine. Hence proposals to bypass the troubled neighbour.

Despite these relationships being established, demand in Europe is falling, and as a consequence Russia should aim to clinch gas deals with both its eastern and western neighbours, to reduce its high dependence on Europe demand and increase its bargaining power.

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