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The status of Chinese–Russian energy cooperation in the Arctic

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Authors: Ekaterina Klimenko & Camilla T.N. Sørensen

[yt_dropcap type=”square” font=”” size=”14″ color=”#000″ background=”#fff” ] T [/yt_dropcap]he Arctic is estimated to contain 30 per cent of the world’s undiscovered oil and gas reserves. Climate change has accelerated the melting of the Arctic ice, making these resources more available. This backgrounder looks at the status of Chinese–Russian energy cooperation in the Arctic.

In the past decade, Russia has been actively developing Arctic resources and shipping routes, while boosting its military presence in the region. While Russia has primarily worked with European countries to develop its energy resources, including in the Arctic, a number of factors have led Russia to reconsider and look even more to Asia for potential investors and technology partners, and as a key consumer market. China is increasingly highlighted as an important partner for Russia in developing the Russian Arctic.

China has increased its focus on and engagement in the Arctic over the past decade. From a Chinese perspective, cooperation with Russia on Arctic resources and shipping routes also helps facilitate a greater Chinese role and influence in the region and gradually gain respect and acceptance for China as a legitimate Arctic stakeholder.

Interests in the Arctic

Russia’s Arctic strategy identifies the following core national interests: (a) use of the Arctic Zone of the Russian Federation as a strategic resource base; (b) safe-guarding the Arctic as a zone of peace and cooperation; and (c) use of the Northern Sea Route as a national integrated transport-communication system for Russia in the Arctic. Among these goals, the development of offshore and onshore oil and gas resources is a top priority.

The Russian economy is largely dependent on revenues from oil and gas. At least 50 per cent of federal budget revenue is generated from exports of energy resources. Most of Russia’s oil and gas production is concentrated in the traditional areas of western Siberia. However, their depletion over the past decade means that the geography of production has been shifting to new regions to the north of western Siberia, including the Yamal Peninsula and the Arctic seas.

To date, China’s focus and activities in the Arctic region have been primarily concentrated on its scientific interests, particularly those that relate to how the melting ice and changing climate in the Arctic will affect China. However, over the past decade, China’s activities have begun to concentrate more on economic interests and concerns about securing and diversifying China’s supply of energy resources and minerals. China has also developed a growing interest in the Arctic shipping routes, which could provide it with alternatives to the longer and strategically vulnerable routes currently in use. Furthermore, China is interested in securing a voice in the evolving Arctic governance regime, which is related to its importance and potential implications for wider global and regional governance.

As a result, China seeks to diversify and strengthen its bilateral relations with all the Arctic states by establishing stronger diplomatic ties, scientific cooperation, and economic partnerships.

Drivers of Chinese–Russian energy cooperation in the Arctic

Russia

Major shifts in world energy markets have significantly affected the development of Russia’s Arctic shelf resources and the expansion of the current onshore resources of the Yamal Peninsula. At least three key factors have led to a significant overproduction of natural gas in Russia and hence delayed the development of gas resources on the Arctic shelf: (a) EU plans to prioritize the diversification of gas suppliers in the European market; (b) difficult relations with Ukraine, which is the third largest consumer of Russian gas; and (c) shale gas revolution has also resulted in the loss of other potential markets.

In relation to oil, estimates suggest that the fall in oil prices has made the development of the Arctic shelf oilfields unprofitable. This will continue to be the case while the price of oil stays below USD $100 per barrel. However, the decisive factor in the need for Russian companies to diversify their partnerships has been the geopolitical tensions between Russia and the West in the wake of the crisis in Ukraine.

The USA and the EU introduced sanctions against Russia in 2014 after Russia’s annexation of Crimea. Among these sanctions, the third package, which was introduced in July 2014, has had significant implications because it concerns the transfer of technologies. The USA and EU sanctions include a ban on the transfer of equipment and technology for deep drilling below 150–152 metres, as well as on exploration and development of Arctic shelf shale oil reserves.

These sanctions forced ExxonMobil, Statoil and other Western companies to suspend their cooperation with Russia in the Arctic. The third package of sanctions also introduced strict financial restrictions, applied to loans of longer than 30 days. The largest Russian banks and corporations in Russia, such as Rosneft, Transneft, Gazpromneft, Gazprom, Novatek, Lukoil and Surgutneftegaz, remain under sanctions. This has made it difficult to seek financing for Arctic projects in Western financial markets.

China

Seen from Beijing, Russia, as the biggest Arctic state, stands as an important gatekeeper and ‘necessary partner’ for non-Arctic states such as China. China knows that in many ways it is dependent on Russia—for example, for Russian goodwill and support—if China is to increase its activities and consolidate its role as a legitimate stakeholder in the region. Consequently, in a Chinese analysis, there is no way to avoid dealing and getting along with Russia in the Arctic.

Despite the lower growth rate of the Chinese economy in recent years, its demand for energy and resources continues to grow and its state-owned enterprises are continuously encouraged to identify and establish new areas for exploration and extraction. China sees the Russian Far East, Siberia and the Russian Arctic as increasingly important due to their potential in relation to energy resources, export markets and new shipping and trading routes. It also sees these regions as recipients of and partners in Chinese-led infrastructure and other development projects.

These activities have synergies with China’s high-profile ‘One Belt, One Road’ initiative, through which China is seeking access to vital European markets through Central Asia and Russia. China also seeks to take advantage of current Russian geostrategic and geo-economic vulnerabilities and of Russia’s need for China as a partner to gradually strengthen its presence and relationships in the Arctic.

Concrete steps towards Chinese-Russian cooperation on the development of the Arctic shelf

In February and March 2013, during a round of oil delivery negotiations, Rosneft and the China National Petroleum Corporation (CNPC) discussed opportunities for cooperation on shelf projects in the Arctic Barents Sea and Pechora Sea, with a particular focus on the Zapadno-Prinovozemelsky, Yuzhno Russky, Medyskoe Sea and Varandeyskoe Sea deposits. Among these, the Medyskoe Sea and Varandeyskoe Sea are the most promising, containing an estimated 3.9 million and 5.5 million tonnes of oil per year, respectively. Although the head of Rosneft, Igor Sechin, confirmed a commitment to work with China on the Arctic shelf early in 2014, however, no official confirmation or details have yet to emerge.

In late 2015, Russia’s Deputy Energy Minister reiterated that Rosneft was still ‘negotiating’ and ‘discussing’ its participation in Arctic shelf energy and extraction projects with China. The relative lack of progress over nearly two years could indicate that China is either reluctant to invest or trying to get a better deal. Moreover, the fact that China did not invest in the Vankor deposit in East Siberia and did not buy Rosneft’s shares could demonstrate that its interest in the Russian upstream has decreased, or that it cannot accept Rosneft’s conditions. It could also be argued that the Russian oil and gas delivery deals that China secured in 2013 and 2014 have reduced its overall interest in the Russian upstream, including in the Arctic. Nonetheless, analysts continue to claim that China wants not just to be part of, but to have a managerial stake, in these Arctic projects.

Another unanswered question is the extent to which Chinese companies can replace the work of Western partners on the Arctic shelf, particularly their technological assistance. Despite such concerns, Russia and China have increased their technological cooperation in the oil and gas sectors since the imposition of sanctions. In September 2015, for example, China Oilfield Services Limited (COSL) signed deals with Rosneft and Norwegian Statoil to drill two exploration wells in the Sea of Okhotsk, which has similar conditions to the Arctic. Igor Sechin noted that the agreements unlocked new potential for cooperation on oil and gas resource exploration by industry leaders in Russia, Norway and China. The extent to which this potential will affect the Arctic remains to be seen.

Emerging Chinese-Russian cooperation on the Yamal Peninsula

If offshore projects remain a question for the future, onshore cooperation in the Arctic is already advancing. In February 2013, the head of Novatek visited China as part of an official Russian delegation to discuss opportunities for cooperation on its main Arctic project, Yamal liquefied natural gas (LNG). As a result of this visit and several subsequent rounds of negotiations, on 5 September 2013, Novatek and CNPC signed a contract for the sale of a 20 per cent stake in Yamal LNG. The agreement includes a long-term contract for the supply of not less than 3 million tonnes of LNG per year to China, which is 18 per cent of total capacity. The deal was approved by the Russian Government in November 2013 and signed in January 2014.

Following the breakout of the crisis in Ukraine, Novatek became the target of sanctions and Yamal LNG faced further financial difficulties. Novatek was forced to seek further engagement with foreign partners and China was among the few remaining alternatives. In September 2015, Novatek sold the Silk Road Fund, a Chinese sovereign fund, a further 9.9 per cent of Yamal LNG for approximately EUR €1.09 billion. In December 2015, as part of the deal, Novatek received a loan from the Silk Road Fund of EUR €730 million for a period of 15 years to finance the project.

As a follow-up to these advances, on 29 April 2016 Yamal LNG announced the signing of agreements with the Export-Import Bank of China and the China Development Bank on two 15-year credit facilities of a total amount of EUR €9.3 billion to finance the project. China will therefore provide up to 60 per cent of the necessary capital to implement the project.

Despite this impressive track record of cooperation on Yamal LNG, two problems reveal the limits of possible Chinese-Russian energy cooperation. First, Novatek had serious difficulties in securing Chinese financing for the project. The deal was only concluded after numerous delays and negotiations. Second, China also received huge benefits from the deal, since up to 80 per cent of the equipment for Yamal LNG will be produced in Chinese shipyards.

This shows that, despite China’s interest in energy projects in the Arctic and Russia’s eagerness to obtain Chinese partnerships, there are a lot of difficulties ahead. Chinese companies will work on projects that they are interested in only under conditions that they find acceptable. Thus, Russia will have to offer good conditions to attract the Chinese and develop Chinese–Russian energy cooperation.

Looking forward

Despite the stream of positive adjectives flowing from both Russia and China in recent months about partnership and friendship, cooperation in the Arctic has not progressed much. Except for cooperation on the Yamal Peninsula, Russian and Chinese companies have not yet found further mutual ground for energy cooperation in the Arctic.

On the one hand, Russian companies need and welcome Chinese investments and loans; on the other hand, they are not entirely comfortable allowing Chinese companies to play too big a role in Russian energy projects, including those in the Arctic. Chinese companies, in contrast, are in a very strong position at the moment and would not agree to anything less than a significant controlling and management role.

As a result, there is a degree of disappointment in Russia that energy cooperation with China has not developed as anticipated and thus has not mitigated the crisis with the West to the desired degree. Seen from Russia, China has taken advantage of the situation, for example to extract especially favourable terms on energy deals and to insist on high interest rates on major Chinese loans. That is, China has not shown the expected goodwill, which is why using the Chinese–Russian partnership as leverage against the West has not worked.

This topical backgrounder is based on the upcoming policy paper ‘Emerging Chinese–Russian Cooperation in the Arctic: Possibilities and Constraints’ by Camilla T. N. Sørensen and Ekaterina Klimenko. First published at SIPRI.org

(*) Camilla T. N. Sørensen is Assistant Professor at the Department of Political Science at the University of Copenhagen.

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Energy

MBS Outmaneuvers Russia’s Oil Politicking

Saad Khoury

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In the wake of the coronavirus outbreak, one of the major economic consequences has been the substantial hit to the energy industry.

Ever since the virus began to spread in January, global markets have been tumbling. This set the price of oil in a downward spiral, reversing many gains  that had accumulated over the last several months. Demand for oil dropped for the first time in over a decade and forecasters at the International Energy Agency assess the decline will continue. While natural gas and coal markets have also been hit, oil demand has dropped more pronouncedly given it supports the freight and logistics sectors that have ground to a halt in recent weeks. The lack of demand for oil in China alone has had a devastating impact – Beijing’s newfound hunger for the commodity was responsible for most of the price increases recently.

However, these unique phenomena have had effects far beyond the purely economic. Politically speaking, the oil market crisis has pitted two global energy giants against each other, producing very intriguing results.

In early March, a meeting took place between the Organization of the Petroleum Exporting Countries (OPEC) and ten other oil-producing countries, known as “OPEC+”. During the conference ending on March 6, Saudi Arabia’s leader, Prince Mohammad Bin Salman Al Saud (MBS) reportedly pushed the idea of coordinating a reduction of output between Saudi Arabia and Russia. MBS planned to reduce output by over 1 million barrels per day, offsetting the major decrease in demand that had been triggered by the corona crisis to stabilize the market. The plan seemed like it was ready to go through until Moscow announced at the last minute that it would refuse. The Kremlin’s about-face came as a shock to OPEC and the international community who saw the move as an attempt to torpedo and politicize the oil sector.

Indeed, oil prices plunged by nearly 10% following the surprise move. It had been widely expected that the Russians would go along with the plan, simply because the alternative, i.e. leaving oil markets in a high-supply-low-demand frenzy, seemed much worse.

So what was at the heart of Russia’s bizarre decision? Revenge.

Washington imposed sanctions on Russia’s oil giant, Rosneft, a month ago over the company’s continued support in selling Venezuela’s oil. In an effort to retaliate, and perhaps prevent future American sanctions, Moscow was hoping to get Riyadh on its side in a plan to inflict economic pain on US shale producers. Moscow has for long felt American shale has been getting a free ride on the back of OPEC+ production cuts. For Moscow’s plan to work, it would still need the support of OPEC+ to ensure that price drops remained temporary and sustainable, since Russia’s oil economy cannot support its country playing oil politics for too long or for too much.

MSB on his part refused to take Russia’s actions lying down.

Almost immediately after Russia’s decision, Riyadh cut its official selling price for April down to $8, from a previous $14, in an effort to pressure Russia back into a deal. Days later, the Saudi government said it would begin increasing oil output to reach a record 13 million barrels per day. The decision came after authorities had already announced they were planning to increase output to 12.3 million. In a statement, Saudi Aramco, the largest energy producer in the world, stated, “it received a directive from the Ministry of Energy to increase its maximum sustainable capacity from 12 million barrels per day to 13 million.”

In essence, MBS has outmaneuvered the Russians in their attempt to hurt the global market and circumvent the effects of sanctions. In other words, MBS called Russia’s bluff by lowering prices even further so that the Kremlin could not dictate terms to OPEC. An impressive example of standing up to Russian manipulation, something that Western powers have been struggling to do for years. 

Russia on its part has been reeling from the effects of the Prince’s decision. 

On March 10, Russian Energy Minister Alexander Novak sought to project confidence, but acknowledged there was a decrease in prices and an increase in volatility. Novak also seemed to have admitted that his government made a mistake and had sought to reach out to the Saudis to “scheduled further meetings to estimate the situation.”

It is important to highlight that Russia was very likely thrown off balance by the Saudi reaction here. Moscow is not used to having its highhanded moves being responded to in kind, and almost certainly did not expect MBS to respond the way he did.  

While the future of this fallout is still unknown, one thing is certain: MBS has demonstrated his country will not be another pushover to Russian aggression.  

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Saudis’ price war or a Russian plot against U.S. shale?

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Since early Monday, the announcement of a “price war” between Saudi Arabia and Russia, two biggest OPEC+ allies, hit the headlines of almost all of the world’s news agencies and outlets and released a wave of panic across the markets all around the world.

Following the two sides’ bitter break up on Friday, oil markets started the week with a free fall; prices plunged nearly 30 percent on Monday to record the sharpest one-day fall in the past 29 years when the first Persian Gulf War was started in 1991.

Brent crude futures fell to nearly $30 on early Monday, the prices, however, bounced back later that day as the impacts of the event faded.

Energy experts and analysts are suggesting two completely different scenarios to explain the series of events that led to the Friday decision.

In one scenario, the one that is broadcasted globally, Saudi Arabia which wanted higher prices or at least wanted to maintain the current price levels asked for more cuts but Russia was OK with the current prices and even was ready for lower ranges so they didn’t agree and the OPEC+ deal ended.

The second scenario, which is more intriguing and more controversial, says that there is no “price war” between Saudi Arabia and Russia, and what we are witnessing is, in fact, Russia declaring war against the U.S.’s “global energy dominance”!

To learn more about the issue, the Tehran Times conducted an interview with Mahmoud Khaqani, an international energy expert. What follows is a summary of the expert’s views on the matter.

Saudis and Russia

Obviously, these days Saudi Arabia is not experiencing its best days. The Kingdom is under pressure both economically and politically.

According to Khaqani, the plunge in oil prices due to the sharp decline in global demand following the spread of coronavirus and its impact on the global economy and transportation has added significantly to the crown prince’s problems causing the young prince to call for deepening of the current 1.8 million cuts.

When faced with disagreement from its biggest non-OPEC allay Russia, the angry Saudi immediately lashed back by offering huge discounts for their oil prices and announcing that they would boost their production to more than 12 million barrels per day (bpd).

Russia, on the other hand, has maintained a calm attitude, saying that its oil industry is resilient enough to keep its market share and withstand even higher price downturns, he said.

Russia and the U.S.

Khaqani believes that the Russians are in fact at war with the U.S. oil industry, and Washington’s use of oil as a strategic asset.

What they call “price war” has already hit the U.S. oil industry hard since Friday and the persistence of the situation could damage the U.S oil industry and dethrone the U.S. from its position as the world’s largest oil producer.

Russia has targeted not only the U.S. oil industry but also the country’s bigger strategic programs for using oil and energy as leverage for applying corrective sanction policies, which Kremlin is already under.

Analysts believe that Russia is trying to thwart the U.S. sanctions that have been intervening with the completion of the country’s Nord Stream 2 pipeline project, which would take natural gas to Europe, making Russia one of the biggest energy players in the world.

The U.S.

In response to the mentioned scenarios, The U.S. Department of Energy (DOE) has said that the U.S. will take all necessary measures to maintain its role as the world’s top energy producer and in fact, the country is not going to step back from its “global energy dominance” strategy.

Khaqani believes that the U.S. is seeking to take Saudi Arabia’s role in the oil market becoming the new swing producer capable of regulating production levels to control oil prices.

“These attempts by state actors to manipulate and shock oil markets reinforce the importance of the role of the United States as a reliable energy supplier to partners and allies around the world. The United States, as the world’s largest producer of oil and gas, can and will withstand this volatility,” the DOE said in a statement.

Final thoughts

Whatever the real reason for the rift between Saudi and Russia is, its impacts on the oil market are undeniable.

If the “war” is just between the kingdom and Russia many believe that the impacts will be short-lived and in the near future, we would witness the markets getting back to a more stable status.

The fact is that now after the break-up Saudi Arabia is going to flood the already oversupplied market with oil and eventually Russia which is not able to increase its production as much as the kingdom will have to step back.

If the second scenario is correct, however, we should expect more complications.

From our partner Tehran Times

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Oil Wars: Russia and Saudi Arabia in the forefront

Sisir Devkota

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Recent developments in Italy and the stock market have things in common. Both came as an alarming surprise; while Italian authorities took stringent measures to lock down the entire nation due to Covid-19 fears, oil prices plunged remarkably in the past week. Rather shamelessly, Russia and Saudi Arabia are exploiting the international epidemic; in order to eclipse a once in a lifetime opportunity. As Saudi Arabia and Russia fought against each other to increase production, oil prices spiraled down in years. The oil giants are looking to consolidate losses from the past. Primarily, both the nations are looking to keep American oil supply arrested, amidst the pandemic uncertainty. As OPEC nations agreed to limit production in order to maintain oil prices, Russia disagreed, prompting the kingdom to counter a bizarre monopoly. The virus has kindled new age energy wars; at the epicenter, are two nations, displaying dreadful nature of international responsibility.

History is key here. Saudi Arabia is sluggishly recovering from an oil field disaster while Russia is eyeing years of forfeited trade advantage caused by western sanctions. International effort is concentrated towards containing the virus, whereas handful of interest agencies along with both nations are seeking an unlikely triumph. A true windfall has caught Russia by surprise, a rare opportunity that will not slip from Putin’s hand. On the other hand, Saudis, rather egoistically are pursuing their godsend place in the international energy market. The scuff is undoubtedly interesting, however; consequentially, it will also determine fortunes for some and famine for others. OPEC’s decision to lower production in order to maintain current oil price is not a samaritan effort; nevertheless, it would have saved capital over-indulgence that could have instead concealed humanitarian efforts to contain the pandemic. For now, management is key and stock market health can prove to be momentous. A lively market is key to ward off unprecedented economic stress.

Russia and Saudi Arabia’s naivety has led to extreme stock market resistance. The world is watching the fight closely, waiting and hoping for the standoff to deflate. It is not the stalemate that is most worrying; unusual market activity is quietly manufacturing an enormous bubble waiting to crack. Market resistance is tipping at a dangerous degree; world markets are sincerely counting on each other for support. For instance, consider how markets would plunge lower than they otherwise would, as oil prices keep decreasing uncommonly. A sinking ship is resisting, waiting for water levels that can only drown by all rationality. Hence, the analogue.It would have taken Russia and Saudi Arabia a great deal of conscience to withdraw national interests for the sake of global welfare. Just in case the virus does not cease to pare, we are in for a truly global disaster. As more nations will testify infected population, the stock market will increasingly face nervous breakdowns. Then after, it will be impossible to guess directions.

Reduced oil prices will complement some and destroy others; the relationship is so disturbing that daily economics might just have to re-invent itself in the face of unpredictability. Imagine the aviation industry exhausting oil demands, in the face of historic low prices. Russia and Saudi Arabia understand the tradeoffs, yet national interests have blindfolded competing energy giants. In the long run, Russia and Saudi Arabia would have stored enough barrels to dictate oligopoly. Alluringly, the case does not rest there. Both the nations will also be hoping for which now looks like a miraculous recovery from the pandemic; future profits will uncharacteristically depend on a healthy market. The risk has been taken despite of all uncertainties. For a change, both Putin and Bin Salman will also be praying, nevertheless.

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