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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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The EV Effect: Markets are Betting on the Energy Transition

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The International Renewable Energy Agency (IRENA) has calculated that USD 2 trillion in annual investment will be required to achieve the goals of the Paris Agreement in the coming three years.

Electromobility has a major role to play in this regard – IRENA’s transformation pathway estimates that 350 million electric vehicles (EVs) will be needed by 2030, kickstarting developments in the industry and influencing share values as manufacturers, suppliers and investors move to capitalise on the energy transition.

Today, around eight million EVs account for a mere 1% of all vehicles on the world’s roads, but 3.1 million were sold in 2020, representing a 4% market share. While the penetration of EVs in the heavy duty (3.5+ tons) vehicles category is much lower, electric trucks are expected to become more mainstream as manufacturers begin to offer new models to meet increasing demand.

The pace of development in the industry has increased the value of stocks in companies such as Tesla, Nio and BYD, who were among the highest performers in the sector in 2020. Tesla produced half a million cars last year, was valued at USD 670 billion, and produced a price-to-earnings ratio that vastly outstripped the industry average, despite Volkswagen and Renault both selling significantly more electric vehicles (EV) than Tesla in Europe in the last months of 2020.

Nevertheless, it is unlikely this gap will remain as volumes continue to grow, and with EV growth will come increased demand for batteries. The recent success of EV sales has largely been driven by the falling cost of battery packs – which reached 137 USD/kWh in 2020. The sale of more than 35 million vehicles per year will require a ten-fold increase in battery manufacturing capacity from today’s levels, leading to increased shares in battery manufacturers like Samsung SDI and CATL in the past year.

This rising demand has also boosted mining stocks, as about 80 kg of copper is required for a single EV battery. As the energy transition gathers pace, the need for copper will extend beyond electric cars to encompass electric grids and other motors. Copper prices have therefore risen by 30% in recent months to USD 7 800 per tonne, pushing up the share prices of miners such as Freeport-McRoran significantly.

Finally, around 35 million public charging stations will be needed by 2030, as well as ten times more private charging stations, which require an investment in the range of USD 1.2 – 2.4 trillion. This has increased the value of charging companies such as Fastnet and Switchback significantly in recent months.

Skyrocketing stock prices – ahead of actual deployment – testify to market confidence in the energy transition; however, investment opportunities remain scarce. Market expectations are that financing will follow as soon as skills and investment barriers fall. Nevertheless, these must be addressed without delay to attract and accelerate the investment required to deliver on the significant promise of the energy transition.

IRENA

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Lebanon and Syria: A Complicated Relationship between Energy and Geopolitics

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Syria continues to offer the ground where Russia and the United States compete over control of oil and gas fields and the transportation routes that bring energy to consumers. Russia seeks to expand its energy footprint in Syria to build influence over rebel-controlled areas in Northeast Syria that are backed by the American military and over neighbouring Lebanon through Syria’s Mediterranean coast.

The Syrian government’s decision to sign exploration and production contracts with Russian energy companies Mercury LLC and Velada LLC for three blocks in different parts of Syria ensures delivery on Russian objectives. The contracts for oil and gas exploration include a gas field north of Damascus, and oilfields in west of Deir Ez-zor and near the oil-producing town of Rasafa in Northeast Syria. Russian energy companies have also reportedly taken over contracts for hydrocarbon exploration in three blocks off Syria’s Mediterranean coast, while a Russian ship conducted geophysical mapping across Syrian and Lebanese territorial waters for gas exploration. The presence of Russian energy companies Mercury LLC and Novatek, both with direct ties to Kremlin, in Syrian and Lebanese maritime blocks signal a long-term involvement of Russia in the East Mediterranean’s energy geopolitics.

New sanctions on Syria under the Caesar Act that took effect in June 2020 are an American tool to counter Russian companies from doing business in the Syrian petroleum and military sectors and in rehabilitating Syria’s energy infrastructure. The presence of small sized American Delta Crescent Energy company in northeast Syria solidifies American energy interests in the region and cements U.S. alliance with the Syrian Democratic Forces. The fact that the U.S. Department of Treasury extended a waiver to Delta Crescent Energy to allow development of oil and gas fields and to revamp the energy infrastructure in northeast Syria shows American commitment to maintain a long-term presence in Syria.

In fact, Delta Crescent Energy plans to build a refinery in northeast Syria at a cost of 150 million dollars. The aim is to reduce the northeast’s dependence from the Assad government where currently there is no refining capacity and as consequence, all extracted oil from the American-backed Syrian Democratic Forces is sold to the Assad government and is bought again after it is refined.  Delta Crescent Energy signed a contract with the Syrian Democratic Forces that foresees not only exploration and development of energy resources but also construction of transportation infrastructure so that energy products reach the international market either through Turkey or the Kurdistan region of Iraq. 

In this complex context, it seems that it would be of great value if revenues from oil and gas trade are directed to alleviate the humanitarian burden in Syria and to restore basic infrastructure. 

In neighbouring Lebanon, the surge in coronavirus cases in Lebanon and global low oil prices prompted the government to postpone the second international licensing round for the third time to the end of 2021. This development along with the failure to identify commercially viable gas in block 4 impedes Lebanon from proceeding with long-anticipated projects like Liquefied Natural Gas (LNG) terminals and Floating Storage and Regasification Units (FSRU). In addition, the lack of bidders or potential financiers puts on hold the construction of power plants that will convert gas into electricity for domestic consumption.

The development of Lebanon’s hydrocarbon reserves faces internal and external challenges ranging from lack of institutional mechanisms to enhance transparency and accountability to geopolitical complexities that hinder overall exploitation in block 9 that is located on the disputed Lebanon-Israel maritime border. Poor drilling results in block 4 that lies in the Lebanese Exclusive Economic Zone (EEZ) has surfaced the absence of transparency that favoured the diffuse of conspiracy theories. One such conspiracy held that the block’s consortium found gas but was forced to falsify its report for political reasons. In fact, conspiracies have come to counterbalance perpetual failure of the existing political system to address deep-seated economic problems that plague Lebanon.

Lebanon’s gas hopes are built on exploration of block 9 that is partly disputed by Israel. Lebanon has been sceptical about Israel’s initiation of oil and gas exploration activities in a maritime area close to disputed Block 9 and within block 72, previously known as Alon D, that lies in the northern part of Israel’s EEZ. Interestingly, Israel has released a map, in light of the upcoming 4th international offshore licensing round, that does not extend the northern limit of block 72 into the Lebanon-Israel disputed maritime area. This can be viewed as a token of de-escalating bilateral tensions while leaving room for third party mediation.

American mediation to settle the Lebanon-Israel maritime 854 km dispute resumed in October 2020 at a base of UNIFIL, the UN peacekeeping force. Discussions have been conducted upon a map that was registered with the UN in 2011 with Lebanon raising demands for an extra sea area of 1,430 sq. km further south extending partly to Israel’s Karish gas field that is owned by Greek medium-sized company Energean Oil & Gas. On the other side, Israel demanded the maritime border to be moved further north in compliance with its traditional position that it is entitled to potential gas findings in Block 9.

For the resolution of the maritime dispute that could unleash Israel’s and Lebanon’s energy potential, various proposals have been put in place. The most representative is the 2019 proposal of David Satterfield, former US deputy assistant secretary of state, that centred on the establishment of a mutual trust fund under UN supervision so that profits are allocated to Lebanon and Israel in accordance with an agreement over gas fields’ distribution and profit-sharing percentages. Another proposal that surfaced recently revolves around a likely constructive role of the UAE in the resolution of the Lebanon-Israel maritime dispute through the taking over of a development and operational stake in northern Israeli blocks and in Lebanese southern blocks. Overall, likely unitization agreements can ensure joint development and production of the reservoirs across the disputed maritime border maximizing the economic recovery of gas from licenses of the contract areas.

Evidently, Syria and Lebanon must explore opportunities in terms of financing, revenue sharing and political relations with third countries. Despite challenges both countries have an interest in ensuring that they are not excluded or left behind from regional energy cooperation. In this respect, time is of paramount importance.

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Future Belongs To Renewable Sustainable Energy: Geothermal is one of them

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The future of power depends on the sustainable and renewable energy resources which are eco-friendly. The demand of the 21stcentury is to execute the non-conventional resources of energy for the betterment of environment and planet earth. According to national geographic report 320 billion kilowatt-hours of energy consume on daily basis worldwide. Energy obtained from the conventional resources contributes greatly towards the emission of greenhouse gases causing ozone depletion by the release of chemical compounds of chlorine and bromine by industrial and human activities. The need of the hour is to incorporate the replacement of conventional energy resources by different renewable energy sources like ocean energy, wind energy, solar energy and geothermal energy which are more suitable, convenient and environment friendly.

Renewable energy sources introduce the ecological balance and provide solutions for environmental, social and economical problems by mitigating the emission of carbon dioxide, carbon monoxide and sulfur dioxide. With an increase in population and industrialization the energy demand is readily increasing exponentially; fossil fuel energy is disastrously effecting the environment of mother planet. Strategic decisions ought to be taken by higher authorities to overcome the monopoly and oligopoly of the giants of oil and gas industry and engage them to exploit the modern techniques for the extraction of geothermal energy either from the hydrothermal reservoirs, hot dry rocks, and high pressure zones in subsurface or magma. Endorsements of geothermal power plants provide an alternative source of energy by significant contribution to meet the essential requirement of energy. Initiative of sustainable energy plants by the collaboration of current Stake holders of oil and gas industries and balancing interstate energy relations are the most crucial tasks to launch the renewable energy resources in the current traditional market of oil and gas. States should endeavor and propose the private stake holders of oil industries economical shared based models for introducing the new phase of renewable energy. It is obvious and crystal clears that without the enthusiasm and support of monopolistic lobby of industrialist; it will not be an easy task to replace the world from conventional to solar, wind or geothermal energy.

According to the report published in an article on sustainable energy in “energy exploration and exploitation” journal that heat energy within the subsurface at depth of about 0-10km holds245.106 EJ(exajoules)and 181.106 EJfor high and low temperature respectively. Only 0.1% of the geothermal reserves are enough to run the wheel of technology for 1000 years. Most of the developed countries have planted the geothermal projects and producing billion of kilowat hours energy to meet their power needs. United States leads the world by projecting seven geothermal power plants and exploring 16 billion kilowatt hours of energy to fulfill the energy requirements in the states of California, Nevada, Utah, Oregon, Hawaii, Idaho and New Mexico. EIA (Energy Information Administration) of US validates in 2018 that 83 billion KWh of electricity is generated from geothermal resources by 27 countries like Indonesia, Kenya, Italy, Iceland and etc. Ambitious and extensive plans of geothermal energy should be encourage for execution in the developing countries. Although the transition of fossil fuel is a challenging task but once we will pass this obstacle it will impart enormous impacts on the future economic growth and furthermore, it we be a great courtesy on climate and environment of the entire globe.

The recent facts and figures of IRENA (International Renewable Energy Agency) of the last decade shows an increasing trend from 9992MW to 13909MW in geothermal installed capacity of power generation. The exigency of the hour is to follow the new paradigms of developed countries on sustainable energy like an Iceland is surprisingly providing 100% sustainable electricity by making use of wind, solar and mostly geothermal. Geothermal is one of the most reliable renewable source of energy amongst solar, wind and biomass because of the exceptionally constant source of energy. An International financial advisory and asset management firm (Lazard) summarizes head to head comparison of 16 renewable energy sources versus six conventional sources and incorporate the cost of financing, operating, building and maintaining. The analysis depicts distinctly that the average cost of 10 renewable technologies is $147 per megawatt-hour; 18$ less than the conventional or traditional sources. Although the projection of new technology plants like solar, wind and geothermal is costly, but once it is build, it has dramatically less cost of maintenance and operation and 25% to 50% high efficiency as compared to the fossil fuel.

To recapitulate all facts and figures along with environmental factor, geothermal is one of the most vital technique to unfold the hidden assets of renewable energy. Furthermore, it provides constant source of energy along with the high efficiency and long lasting life span of heat pumps with little or no maintenance cost validates its future economic prospect.

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