Russia Seeks Chinese Investment in Expanding Energy Cooperation
Russia’s Strategic Energy Expansion with China
In recent years, Russia has been actively working to broaden its energy cooperation with China, seeking to extend their partnership beyond the mere supply of hydrocarbons. This ambitious endeavor aims to integrate advanced technologies, machinery, and alternative energy solutions into their collaborative framework.
Strengthening Energy Ties
According to Rosneft CEO Igor Sechin, the next phase of the Russia-China energy relationship should focus on deepening coordination across the entire value chain. This includes sectors like advanced technologies, modern shipbuilding, industrial equipment supply, alternative energy, emissions reduction, and joint scientific research.
However, a more critical aspect for Moscow is securing direct Chinese investments in Russia’s energy sector and related industries. At the Russia-China Energy Business Forum held in Moscow on July 23, Sechin emphasized the need to increase these investments, highlighting the high profitability and low capital return risk of Russia’s energy sector.
Despite Sechin’s appeal, Chinese investors have been hesitant to replace Western firms that exited Russia following the Ukraine conflict. Ongoing sanctions against Moscow have further contributed to this cautious stance. Nevertheless, China has ramped up its purchases of Russian oil and gas, which has been vital for Russia as it seeks to diversify its markets away from the West.
Expanding Energy Cooperation
Increased Oil and Gas Purchases
China’s imports of Russian oil surged by 24% last year, reaching approximately 2.15 million barrels per day and further increasing to 2.21 million b/d in the first half of 2024. These figures were highlighted by China’s Vice Premier Ding Xuexiang during a meeting of the intergovernmental commission on energy cooperation in Moscow.
Russia has expressed its readiness to boost supplies through its western ports and the Northern Sea Route, in addition to the regular exports from its Pacific outlets. However, shipments via Arctic waters would necessitate China’s assistance in building ice-class tankers, prompting Sechin to call for collaboration with Chinese shipyards.
China’s Cautious Approach
Analysts remain skeptical about China’s willingness to become overly dependent on a single supplier. At the Moscow forum, Vice Premier Ding Xuexiang cautiously remarked that both sides are “actively working on opening new horizons for cooperation in the oil and gas area.”
Joint Exploration and Production
During the intergovernmental commission meeting, both parties agreed to support joint exploration and production of hydrocarbons onshore and on Russia’s continental shelf. They also decided to deepen cooperation in providing oil services and equipment, attracting specialized Chinese companies for tasks such as hydrofracturing.
Renewable Energy and Carbon Markets
The two nations pledged to conduct expert seminars on renewables and work towards international recognition of certificates for green and low-carbon energy. As part of their energy transition cooperation, Russia and China will share experiences in carbon market development and international carbon units trade.
Diversifying Energy Ventures
Coal, Electricity, and Nuclear Power
Cooperation in coal, electricity, and nuclear power remains a cornerstone of the Russia-China energy dialogue. Beijing supports Gazprom’s plans to supply helium and LPG to China, and both sides aim to enhance LNG trade on a commercial basis.
Strategic Projects
Yamal LNG, a project in which Chinese companies hold shares, continues to be a strategic initiative. Both countries have agreed to maintain communication on mutual interests related to this project.
Power of Siberia 2 Pipeline
No significant progress has been reported on the Power of Siberia 2 gas pipeline. However, it was suggested that Gazprom and China National Petroleum Corp. should intensify their negotiations over the contract.
Revenue and Market Dynamics
Growing Revenue from Power of Siberia
Russian gas supplies via the Power of Siberia pipeline are on the rise. In June, Gazprom recorded a record monthly revenue of $737 million from these supplies, marking a 30% increase year-on-year. This revenue milestone was the highest since the pipeline began operations in December 2019.
Gazprom’s revenue from exports to China is nearing the levels previously seen from pipeline gas supplies to Europe, which was Russia’s key gas market before the war.
Volume and Pricing Challenges
While export volumes to China are expected to match those to Europe, with both slightly exceeding 30 billion cubic meters this year, the revenue from China is likely to remain lower. This is due to the oil-linked pricing for Power of Siberia, which is below Gazprom’s European prices.
Gazprom’s average export price to China might have averaged around $260 per thousand cubic meters, compared to approximately $340/Mcm in Europe during the first half of this year, according to Energy Intelligence estimates.
Future Revenue Projections
Gazprom’s Power of Siberia revenue is projected to surpass that of Europe next year when the pipeline reaches its full capacity of 38 Bcm/yr. However, exports to Europe are likely to remain at the same level or even decline, depending on the outcome of the Ukrainian transit contract, which expires at the end of this year.
Despite the increasing revenue from China, it remains a fraction of what Gazprom used to earn from Europe before the war. The lower sales margins are attributed to the lower price and higher upstream and transportation costs for Power of Siberia.
Future Contracts and Bargaining Power
New Export Contracts
Gazprom’s new export contracts with China are expected to follow a similar pattern, with Beijing in a strong position to negotiate favorable terms. The pricing details for the 10 Bcm/yr “far eastern route” contract, signed in early 2022, have not been disclosed. Gazprom aims to start supplies in 2027, and China is reportedly pushing for import prices close to Russian domestic tariffs under the long-negotiated 50 Bcm/yr Power of Siberia 2 supply contract.
FAQs
Q1: What are the main areas of cooperation between Russia and China in the energy sector?
A1: The main areas of cooperation include advanced technologies, modern shipbuilding, industrial equipment supply, alternative energy, emissions reduction, joint scientific research, and exploration and production of hydrocarbons.
Q2: How has China’s import of Russian oil and gas changed recently?
A2: China’s imports of Russian oil increased by 24% last year, reaching about 2.15 million barrels per day, and further rose to 2.21 million b/d in the first half of 2024.
Q3: What challenges do Russia and China face in their energy cooperation?
A3: Challenges include China’s cautious approach due to ongoing sanctions against Russia, the need for ice-class tankers for Arctic shipments, and the lower pricing and higher costs associated with the Power of Siberia pipeline.
Q4: What is the status of the Power of Siberia 2 gas pipeline?
A4: There has been no significant progress on the Power of Siberia 2 gas pipeline. Gazprom and China National Petroleum Corp. are encouraged to intensify their negotiations over the contract.
Q5: How does the revenue from Gazprom’s exports to China compare to its exports to Europe?
A5: While the export volumes to China are expected to match those to Europe, the revenue from China is likely to remain lower due to lower pricing. However, the revenue from the Power of Siberia pipeline is projected to surpass that of Europe next year.
Conclusion
Russia and China are working to expand their energy cooperation beyond traditional hydrocarbon supplies, exploring new avenues such as advanced technologies, alternative energy, and joint scientific research. While challenges remain, particularly in terms of investment and market dynamics, the increasing revenue from gas exports via the Power of Siberia pipeline highlights the potential for a deeper and more diversified energy partnership. As both nations continue to negotiate and collaborate, the future of their energy relationship looks promising, albeit with cautious optimism.
