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China Trends #3 – China-Russia Energy Cooperation: Hot or Cold?

BLOG - 10 October 2019

The relationship between China and Russia has often been labeled as "hot politics, cold economics" (政热经冷). This assumption has been challenged in the past by experts like Xing Guangcheng, Director of the China Frontier Research Institute of the Chinese Academy of Social Sciences, who argues that the political relationship between the two countries has developed more rapidly compared to the economic relationship, but this should not lead to the conclusion that the economic relationship is "cold". In 2018, economic relations had a breakthrough, with bilateral trade reaching $100 billion. As Gao Feng, Spokesman for China’s Ministry of Commerce, highlighted, 2018 was the "Year of Achievement (成果年)" of China-Russia economic and trade cooperation. Both governments have expressed enthusiasm and hope for the prosperity of their trade relations, and are aiming to achieve up to $200 billion trade volume in the near future.

The political relationship between the two countries has developed more rapidly compared to the economic relationship, but this should not lead to the conclusion that the economic relationship is "cold".

At the core of this relationship is the cooperation on energy. According to Dmitry Kozak, Russian Deputy Prime Minister, energy cooperation "is at a historical peak, and has great potential for development." The two consecutive bilateral Russian-China Energy Business Forums, the first one taking place in Beijing in November 2018, and the second one in St. Petersburg in June 2019, have led to the signing of 33 agreements, signaling the willingness of both sides to push further the energy cooperation. Russia also promised to introduce more industrial support policies in the future to create a more stable, transparent, unified and convenient business environment for the Russia-China energy cooperation.

Currently, key China-Russia energy projects include: the two China-Russia oil pipelines between Mohe and Daqing (中俄原油管道) [1], both operational; the China-Russian gas pipeline between Heihe and Shanghai (中俄东线天然气管道) [2], still under construction; the Yamal Liquid Natural Gas project (亚马尔液化天然气项目) with investment from Russia, China and France, and operational; and the Tianwan Nuclear Power Plant (田湾核电站), using Russian reactors, also operational.

As the list of key projects above illustrates, the two countries cooperate on oil, gas, and power. Taking oil as an example, both countries are complementary to each other, China being the largest oil importer/consumer country, and Russia being the largest oil exporter/production country. Russian oil accounted only for 1.4% of China’s total crude oil import in 1996 [3], but in 2017, it accounted for 11% with an average daily supply of 3 million barrels per day, a yearly increase of 18%. In 2006, during his visit to Beijing, Russian President Vladimir Putin pushed for joint ventures, which led to the establishment of Vostok Energy in Russia, with China National Petroleum Corporation (CNPC) and Russia’s OJSC Rosneft Oil holding 49% and 51% of the share respectively. However, an article published by the China Petroleum Enterprise Association stressed that despite Chinese companies’ increasing involvement in the oil industry in Russia, their level of investment, shareholding ration, and production capability remain limited. The article concludes that China only has leverage in terms of oil trading in the Russian oil industry, making China a vulnerable and dispensable actor that faces a high level of uncertainty.

According to CNPC, in 2018, China’s dependence ratio was 69.8% on foreign oil, and 45.3% on foreign gas. "China's external energy dependence is certainly a ‘weakness (软肋)’, but the huge energy market and consumption capacity are ‘advantages (优势)’ in energy cooperation", noted Feng Yujun, Deputy Director of the Institute of International Studies at Fudan University. He further explains that China seems to be suffering from "energy hunger (能源饥渴症)" and "energy anxiety (能源焦虑症)". However, given that the international oil market’s structure is changing from being the seller’s market to a buyer’s market, China increasingly has more bargaining power given its vast demand, an advantage it has to understand and use.

In addition, Lin Boqiang, Dean of the China Institute for Energy Policy Studies at Xiamen University, reminds us that dependency on foreign energy does not translate into insecurity of energy sources, and that dependency on foreign energy cannot control a nation’s macroeconomy, social stability and foreign policy. Therefore, China is not as vulnerable as it thinks it is, and demonstrating its "energy anxiety" is not going to help it position itself as a prominent actor in the energy business.

"China's external energy dependence is certainly a ‘weakness (软肋)’, but the huge energy market and consumption capacity are ‘advantages (优势)’ in energy cooperation"

Even though China’s dependency per se does not translate into energy insecurity, its dependency on a single source is considered as a vulnerability. Yu Hongyuan, Director of the Institute for Comparative Politics and Public Policy at the Shanghai Institutes for International Studies, and Song Yiming, Researcher at Renmin University of China, highlight China’s need to diversify its oil sources to reduce its dependency on the Middle East, as well as to reduce the transportation risk caused by the Malacca Dilemma [4]. China is heavily dependent on Middle Eastern oil, and 82% of China’s oil imports are shipped through the Malacca Strait. Russia provides one of the few sources that do not go through the Malacca Strait, making Russian oil crucial for China’ improvement of its energy security, Li Peng, Board Member of the Jilin Province Yandong state-owned enterprise, notes as well [5]. While counting on Russia to increase its energy security, another group of Chinese experts points out in a recent paper the value of the existing competition between Russian and Central Asian countries on oil exports [6]. Of course, according to them, the emerging Central Asian oil-exporting countries are not going to threaten Russia’s current dominant position in the short term, but they enrich China’s options. In the same article, the Chinese experts encourage China to take advantage of this competition to lower oil import costs, which will further increase the Chinese energy security level.

Not surprisingly, energy cooperation is also in the interest of Russia, as it alleviates Russia’s economy from Western sanctions and provides a positive boost to its economy. Russia is increasingly "looking East (向东看)", and becoming more active in seeking cooperation with China. For a long time, both Russia and China’s trade policies have been focusing on the West, resulting in an unbalanced relationship between Moscow and Beijing, but now, both recognize the need to not exclude each other from further developments, points out Shi Ze, Senior Research Fellow at the China Institute of International Studies. The current situation, Russia’s usual uneasy relationship with the U.S and China’s ongoing trade war with the U.S., have further brought Russia and China closer. This being said, the relationship is also subject to a number of other variables, including Japanese investment in the Russian energy sector and India’s enormous market demand.

"China is one of Russia's most important partners in the energy sector," and, "Russia will always be a loyal partner in China's energy sector", stresses Aleksey Teksler, First Deputy Minister of Energy of the Russian Federation. China is also cooperating with Russia in the Arctic to build the "Polar Silk Road", but Feng Yujun advises China to be more cautious and fully consider the risks of resources, environment, climate, market and infrastructure while participating in such projects. China is energy dependent, but at the same time, energy exporters like Russia are also dependent on the Chinese market. All Chinese experts quoted in this article are demanding China to become more energy confident and to play its purchasing power card more wisely. China has to make itself a more appealing partner, and move away from being constantly worried about its "energy hunger".

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References :

[1] The first line from Mohe (the northernmost Chinese city, which borders Russia in Heilongjiang province )  to Daqing (Heilongjiang province) was put into use in 2011, with an annual capacity of 15 million tonnes. The second one was built in parallel to the first one, operational since 2018 and doubled the annual import of Russian crude oil from 15 million tonnes to 30 million tonnes.

[2] The Chinese section of China-Russia East-Route natural gas pipeline, starts in Heihe (Heilongjiang Province), and terminates in Shanghai. The section is a spur from running from Siberia to China on the eastern portion of Russia’s "Power of Siberia" pipeline.

[3] Yu Hongyuan & Song Yiming "The Evolution of Sino-Russian Energy Diplomacy 中俄能源外交的历史演进", Area Studies and Global Development, 2018 Vol. 3

[4] Yu Hongyuan & Song Yiming, "The Evolution of Sino-Russian Energy Diplomacy 中俄能源外交的历史演进", Area Studies and Global Development, Vol. 3, 2018

[5] Li Peng, "China's energy security and Sino-Russian energy cooperation 中国能源安全与中俄能源合作", Modern Communication, No.10, 2019

[6] Liang Meng, Peng Yingying, Zhang Yanyun, Sun Li, Ren Zhongyuan, Zhang Qi, and Yang Ying, "Current Status of and Lessons from the Oil and Gas Transit Transportation in Russia and Central Asian Countries俄罗斯与中亚国家的油气过境运输现状及启示",  Oil & Gas Storage and Transportation, July 2019

 

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