How Ukraine Is Changing Global Energy Flows

On September 1, 2014, Russian President Vladimir Putin and Chinese Premier Zhang Gaoli initiated the construction of what they claim will be “the world’s largest construction project.” This 3,968 km “Power of Siberia” pipeline connecting gas fields between Russian’s Siberia and China’s Northeast region is expected deliver four trillion cubic meters of gas to China over the next thirty years. With an estimated 1.2 trillion cubic meters of gas and 93 million tons of liquid hydrocarbons stock, Chayanda fields in the Republic of Yakutia will be the chief production station conveying gas to Northeast China through the border city of Blagoveshchensk. The overall cost of this gigantic enterprise has been evaluated at more than 20 billion dollars, which covers other investments in the region totaling 7.5 billion dollars.

After more than a decade of talks, on May 21 China and Russia concluded a $400 billion deal that would run for 30 years and supply China’s northeast regions with 38 billion cubic meters of gas per year via the Eastern “Power of Siberia” pipeline. The agreement was signed between the state-owned company Gazprom and the China National Petroleum Corp during a two-day visit by Russian President Vladimir Putin to Shanghai. The main obstacle to a conclusion of the negotiations had always been the price, but the prevailing international situation gave China the upper hand. After negotiations that extended into the early hours, a deal was made. Beijing’s leverage had increased in the months leading up to the deal, since it had reduced its need for Russian gas thanks to imports from Central Asian countries and neighboring Myanmar. But although the benefits of the deal to China were obvious, Russia also struck a profitable deal, not only because of its need to find new commercial partners, but also because this was the first step to wider access to Chinese and Asian markets in general.

The conclusion of the China-Russia deal comes at a turbulent time. As the BBC reported, “The deal will lessen Russia’s dependence on European buyers, who have imposed economic sanctions because of the crisis in Ukraine.” Although the West has tried to exempt the gas industry from the most targeted sectors, both EU and U.S. restrictions have compelled Russia to start exploring new alternatives. Moscow-based journalist Dmitry Babich affirmed, “The Ukrainian risks and the position of Europe make diversification a vital necessity” before adding that the China deal “has been seen as a financial lifeline for Russia as it faces growing resistance in Europe since the annexation of Crimea in March.”

This deal is a win for President Vladimir Putin, who is seeking new commercial partners in response to his increasing isolation by the EU and US. The price at which the natural gas will be sold has not been disclosed, but experts have offered estimates. If the $400 billion goes towards the actual purchase of gas, the price will be around $350 per thousand cubic meters of gas, less than the $380.50 per thousand cubic meter sold to Western Europe. However, it is likely that part of the negotiated deal will go to the costly construction of the 4,000-km long Yakutia–Khabarovsk–Vladivostok (also known as “Power of Siberia”) pipeline. Reports suggest that the gas will start flowing towards China from 2018, postponing the real impact of the deal on European countries.

Pushed by the Ukraine crisis, a growing shift might very well be taking place regarding global energy flows. While European countries have been mitigating the crisis by buoying up storage volumes (with tanks at 71 percent across the EU), Russia has been seeking other markets for its mainstay energy exports. “The new gas branch will significantly strengthen the economic cooperation with countries in the Asia Pacific region and above all – our key partner China,” Putin declared at the opening ceremony near Yakutsk. “Once we create a gas pipeline network here in the Far East and Siberia, we will be able to connect European pipeline system to the East.” That would greatly augment export opportunities through an enhanced “gasification” of Russia and would provide it with the upper hand in regulating gas flows in accordance with global markets trends.

Full article: How Ukraine Is Changing Global Energy Flows (The Diplomat)

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