12.01.2021
Does China Need More Gas From Russia
and Central Asia?
China’s Way 瞭華
China’s
commitment to full carbon neutrality by 2060 means that the country needs to
reduce the consumption of all fossil fuels, including natural gas. What does
that mean for Russia and Central Asia?
Chinese President Xi Jinping announced to the UN General Assembly in September 2020
that in forty years, China would achieve carbon neutrality. According to
the road map prepared
by China’s climate scientists, by 2060 the country will reduce oil consumption
by 65 percent and natural gas consumption by 75 percent. Such plans jeopardize
the future of large-scale gas pipeline projects to bring natural gas from
Russia (Power of Siberia 2) and Central Asia (Line D) to China. Is there any
sense in building pipelines if China will reduce gas consumption in forty
years?
The Chinese government is seeking to limit consumption
of coal—the most polluting energy source—in line with the plan to
reach peak carbon emissions by 2030. Natural gas will become a key transitional
energy source in China for the next two decades, since it is considered the
most ecologically friendly fossil fuel.
China is currently the world’s biggest importer of
natural gas. In 2019, 68 percent of natural gas was delivered to China in the
form of LNG, while the rest was supplied by pipelines from Central Asia,
Myanmar, and Russia. Forecasts for
a rise in demand for natural gas in China give Russia, Central Asian nations,
and other suppliers a chance to win a larger slice of the Chinese gas pie in
the medium term. Russia and Central Asia have long had their own large-scale
projects in mind for this: Power of Siberia and the fourth link (Line D) of the
Central Asia-China gas pipeline.
However, even Gazprom, for which construction of Power
of Siberia-2 could become the main project of the coming decade (much like
Power of Siberia was one of the key projects in the 2010s) estimates that
there is limited room for new contracts: a supply and demand gap of 61 billion
cubic meters in 2030 and 161 billion cubic meters in 2035.
The planned capacity of Power of Siberia-2 is 50
billion cubic meters. Also, existing contracts may be extended, and China could
have a technological breakthrough in domestic natural gas production (including
shale gas production), which could reduce the gap. Furthermore, China could opt
to sign contracts for additional volumes of LNG, including from Russia: China
is already the leading foreign investor in Russian arctic LNG projects
implemented by international consortiums headed by Novatek (Yamal LNG and
Arctic LNG-2).
Unlike Russia, Central Asian nations are prepared to
supply natural gas to China on practically any terms. Line D of the
Turkmenistan-Uzbekistan-Tajikistan-Kyrgyzstan-China pipeline was supposed to
be launched by late 2016, but its opening was then postponed to late 2020.
However, construction of the new line was frozen in 2017 under an agreement between
China National Petroleum Corporation (CNPC) and Uzbekneftegaz. In 2020, the
construction of a segment of the pipeline in Tajikistan resumed, but
it was suspended again because of the pandemic.
Turkmenistan would benefit most from the pipeline.
China is practically the only source of revenues for the Turkmen treasury: in
2019, virtually all of
Turkmenistan’s exported natural gas was bound for China.
The transit countries are just as interested in
resuming construction as Turkmenistan. For Tajikistan and particularly
Kyrgyzstan—two of the most indebted to China countries in Central Asia—an
additional source of revenues would be quite welcome at a time when Dushanbe
and Bishkek are trying to solve a number of problems simultaneously: the
consequences of the pandemic, surplus labor, political instability in
Kyrgyzstan, and—in contrast—stagnation in Tajikistan.
Uzbekistan, which is increasing economic ties with its
neighbors and with regional powers, will also be in favor of Line D if Beijing
makes a lucrative offer. In other words, the future of the new pipeline route
from Central Asia is fully in the hands of the Chinese leadership.
The new Power of Siberia-2 pipeline to China means a
lot for Russia. First of all, the resource base for the natural gas to be
shipped along the pipeline is the Yamal Peninsula, which is currently the
source of natural gas for Europe. Gas from the Bovanenkovo field is delivered
to the Nord Stream pipeline. Gazprom expects that increasing production at
Bovanenkovo and adding new deposits (such as Kharasavey and Kruzenshtern) will
increase gas production on the peninsula to 360 billion cubic meters per year—comparable
to the current annual gas imports of the EU.
Meanwhile, Europe has already started implementing
the Green Deal,
under which CO2 emissions in 2030 are slated to be reduced by 55 percent
compared to 1990, and the region is supposed to be carbon neutral by 2050. Such
plans pose an existential threat to suppliers of fossil fuels to the European
market, above all Russia. Naturally, Russia must respond to the EU’s climate
plans with strict control over the carbon footprint of its gas, and the
production of hydrogen from natural gas. However, in the long term, only
diversification of its exports can give Russia guarantees that it will be able
to sell its gas reserves on world markets.
There is no doubt that expanding its LNG sector is a
strategically sound step for Russia. The new planned LNG plants that have been
announced will find buyers for their output. However, gas pipeline projects
should not be completely ignored either. As a rule, pipelines make it possible
to supply more energy at lower investments than LNG plants (an assertion that
may not apply to new greenfield projects).
For China, despite all the drawbacks, stable pipeline
deliveries are less nerve-wracking than purchases on LNG markets, where there
is a risk of geopolitical “black swans” (such as blockades of straits and trade
wars) and natural disasters such as storms and hurricanes. “Stability” is one
of President Xi Jinping’s favorite words, and the “six stabilities” program of
the Chinese government to reduce the impact of the novel coronavirus pandemic
specifically refers to energy security. Russia can use this to its advantage,
and pitch its overland pipeline as a secure and stable source of relatively
“green” energy that is independent from geopolitical turmoil. This positioning
of the project coincides fully with the central idea of the “Energy in China’s New Era”
white paper that the Chinese government published on December 21, 2020.
However, the “predetermined partnership” model that
was tested with Europe could bring surprises to Russia’s relations with China
in the current conditions. On what terms will Beijing be prepared to buy
natural gas from the Yamal? Will it prefer to buy gas from Central Asian
countries that depend on Chinese loans, or will it simply expand its LNG
portfolio? Will Russia find the offered price acceptable (clearly, amid the
current low oil prices, LNG will not fetch a high rate)? How will Beijing play
the climate card, and will it be prepared to sign a two-decade contract if it
plans to end the “golden era” of natural gas?
Answers to these questions will emerge in the near
future. It is apparent that Russia’s time is limited. Negotiations on gas
deliveries to China started in 2004, while deliveries via Power of Siberia only
began fifteen years later.
Over that time, Beijing’s energy agenda could change
drastically. The “fat decades” of the Russian gas industry (the 2000s and the
2010s, when the markets and the super-profits were growing) are over, and the
sector must learn to live in the new paradigm.
Gazprom
will not sell gas from Yamal to China cheap, but endlessly and stubbornly
delaying progress on new routes today could lead to losses of market share in
the future. In conditions of swiftly growing competition by gas suppliers for
the Chinese market, one might cautiously predict that we could hear news about
the Power of Siberia project within 2021.
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