Russia and China summit

I just looked through the web pages for the New York Times and the Washington Post, and neither had prominent stories on what should be an important story. Russian President Putin has concluded a two-day state visit to China.

Besides the global implications of the two Asian giants conducting a summit, some very important energy agreements came out of this summit.

First, Russia has committed to building a gas pipeline to China in the next five years.

Russia said it would give China some relief from energy shortages with the gas project. Putin said the planned pipeline would supply as much as 2.8 trillion cubic feet of gas per year, though he did not specify a route or cost. Russia's Interfax news agency pegged the cost at about $10 billion, citing an unnamed official in the Russian delegation.

Officials with Russia's state-owned gas company, OAO Gazprom, said the two countries would join forces on the project. "We are talking about not only gas deliveries but joint activities in exploration and production," said the company's chief executive, Alexei Miller.

Gazprom's press release stated the following:

In the presence of the state heads the parties inked a Protocol on natural gas supply from Russia to PRC, fixing major accords as for the gas supply timing, amount and routes (Eastern and Western), and gas pricing formula principles.

“Today we have reached the in-principle agreements opening the way for Russian gas to China. The Protocol signed is in line with Gazprom’s strategy to diversify its exports and access new sales markets. Deliveries of Russian natural gas to China through an integrated export channel will foster the supply safety & security. We’re looking upon China not only as the most promising market for exports but also as a partner in joint gas transmission and marketing projects,” maintained Alexey Miller.

Reference:

Being China’s largest 100%-state owned oil and gas business, China National Petroleum Corporation (CNPC) is a leading integrated oil and gas company of the world.

Incorporated in 1998 on the platform of the Oil Industry Ministry of the People’s Republic of China, CNPC is comprised today of companies catering for oil & gas exploration, development, production, transmission, storage as well as oil refining, petrochemicals and research. CNPC is the largest crude oil producer & supplier and retains a dominating position in oil & gas production, processing and marketing over China. CNPC and its subsidiaries supply 79% of the domestic oil market, control 95% and 40% of PRC’s natural gas and oil products markets, respectively, and are involved in 27 international projects.

Gazprom and CNPC sealed an Agreement on Strategic Cooperation on 14 October 2004 in Beijing within the official visit of the Russian Federation President Vladimir Putin to PRC.

Russia and China have been discussing gas and oil pipeline projects for years. It is no small matter that this project is now going forward.

However, the trump card is still the oil pipeline, and Russia was somewhat noncommital on exactly how that project might proceed.

I discussed this planned pipeline in this post, showing how Japan and China were competing for this oil. Russia, while eager to get its hooks into the Chinese market, is also not eager to fuel a rival that could grow into a monster that could not be controlled.

Here is what Russia said during the summit.

Despite the upbeat rhetoric, the visit did not appear to dispel underlying tension in Russian-Chinese relations. The tension is rooted in China’s rapidly rising demand for energy, especially oil. According to some estimates, Chinese oil imports may rise 6 percent in 2006 as Beijing strives to keep the country’s economic boom going. China’s energy needs represent a strategic dilemma for Putin. On the one hand, China represents a lucrative opportunity for Russian energy companies. On the other, if China succeeds in fostering steep and steady growth, the country could soon surpass Russia as a geopolitical heavyweight. Such a development could have a profound impact on political and economic developments in Central Asia. [For additional information see the Eurasia Insight archive].

The clearest reflection of the Russian dilemma was seen in Putin’s reluctance to offer Chinese leaders an unequivocal pledge to build an oil pipeline linking Russia to China. Putin hedged, suggesting that Russia would "actively pursue" the possibility of building a spur to China from the projected Siberia-Pacific pipeline. The Russian president, however, pointedly declined to disclose a concrete timeline.

Russia has been mulling the construction of a $12-billion pipeline from East Siberia to the Pacific that would pump 80 million tons of oil per year. The project has encountered opposition due to its route proximity to Lake Baikal, the world’s largest freshwater lake. But Russian Energy Minister Viktor Khristenko indicated March 22 that a portion of the pipeline could be operational by 2008. Putin has described the Pacific pipeline as a national priority. If the Chinese spur is built, Khristenko indicated that Russia could ship up to 30 million tons of oil per year to China via that route.

In early March, Zhang Guobao, vice-minister of the National Development and Reform Commission, expressed frustration with the pace of the negotiations on both the pipeline and proposed exports of natural gas from Russia. "There has been a lot of communication, but there has been little actual progress," Zhang said.

Putin’s apparent willingness to move forward with an oil pipeline feasibility study should allay China’s concerns for the moment. But, given Beijing’s energy demands, Chinese leaders will soon start growing impatient again, if the feasibility study drags on.

During his trip, Putin indicated that China might have to alter its trade practices in order to secure Russia’s agreement to build a pipeline spur. In a speech to a business forum in Beijing, Putin noted "unfavorable structural changes in Russian-Chinese trade," in which China increasingly used Russia merely as a source of raw materials, especially oil and gas. He described this tendency as "a serious problem." To put trade relations on a more sound footing, Putin said China should start importing more finished products and hi-tech items from Russia. Hu Jintao said at the same forum that Beijing was open to expanding trade in industrial goods, but emphasized that energy would continue to play a central role in the bilateral economic relationship.

We in this country ought to be paying attention to what these deals imply. China's demand for oil is going to grow. From the same Washington Post article linked above,

As China has embraced the automobile and erected factories along the length of its coastline, it has blossomed into the world's second-largest consumer of energy, trailing only the United States. China's oil consumption will grow by nearly 6 percent this year to nearly 7 million barrels per day, according to the International Energy Agency. By comparison, the United States consumes nearly 21 million barrels per day.

Imagine, a country with about four times our population uses one-third the oil There is room for an enormous increase in demand for oil in China. Imagine, as well, what that increase would do to the price of oil worldwide. The effect is already being felt.

There were other agreements reached as well at this summit.

Among the agreements, Russia's gigantic utilities corporation, Unified Energy Systems, signed a contract to export electrical power to China's State Grid Corporation. Rosneft and Gazprom, the Kremlin's favored main oil and natural gas producing corporations, signed agreements to supply their natural resources and carry out joint ventures with the Chinese National Petroleum Corporation, RIA Novosti News Agency reported.

Gazprom Chairman Alexei Miller told the Itar-Tass news agency in Beijing Wednesday that a new 1,800 mile long gas pipeline from Russia to China would be completed in five years. Russia and China have been partners in the Shanghai Cooperation Organization, also known as the Shanghai Pact, since June 2001. But Moscow and Beijing are both emphasizing that the great success of Putin's visit and the far-reaching agreements concluded during it will propel their global strategic partnership to higher levels than ever before, RIA Novosti said.

Even the Kosmicheskaya Svyaz and Chinanetcomgroup telecom giants closed a deal on providing international satellite television coverage from the 2008 Olympic Games in Beijing. Also, Shanghai Industrial Investment Corporation signed off on a giant development project in St. Petersburg, Russia's second largest city.

Other agreements were signed for cooperation in outer space, civil aviation, agriculture, labor services and anti-terrorism cooperation, Lavrov said.

"Strategic cooperation between the two countries globally, regionally and bilaterally enjoys still wider prospects," the official English language China Daily said Monday.

The growing "exchanges in defense technology and coordination of military acts are of great significance," the paper said.

Last August, Russia and China carried out the most extensive joint military exercises in their history. Although the exercises were billed as practice against terrorist threats they involved practicing tactical cooperation in combined land, sea and air operations that would be only required during a full-scale conventional war against mutual adversaries.

This past weekend, the US, Japan and Australia held high-level security talks, in which China figured prominently.

US Secretary of State Condoleezza Rice, Japanese Foreign Minister Taro Aso and their Australian counterpart Alexander Downer met in Sydney for talks on how the three could together deal with issues such as China and how to tackle its growing military strength.

"We welcomed China’s constructive engagement in the region and concurred on the value of enhanced cooperation with other parties such as ASEAN and the Republic of Korea," they said in a statement after the talks.

Rice, winding up a three-day visit to Australia, had been voicing concern that Beijing would become a “negative force” unless it was more open about its military build-up.

"We want conditions in which China’s rise is a positive force in the region," she had said on Friday at a news conference with Australian Prime Minister John Howard.

China sees its rivals warily keeping an eye on the Middle Kingdom, so it is natural China will look to see who its friends are in the neighborhood. A Russia-China axis, with its implications for China's energy demands, should be a very big deal to the Western media.