Inside this
Sino-Russian Oil and Gas Cooperation: Where it Stands and How Far Canitlligand?
Keun Wook Paik
Page 2
The author explores how Russian companies are courting China as a strategy to broaden
natural gas markets. Interestingly, Rosneft and Gazprom are competing for the attention of
China.
A Very British Fiasco Page 11
David Howell
David Howell brings a critical assessment of the United Kingdom's energy and carbon
management policies to light. He observes that poor policies will significantly increase
energy prices by encouraging investment in expensive programs and projects, and not
necessarily deliver the objective of reduced carbon emissions.
OXFORu 1NSTITUTL
FOR ENERGY STUDIC
CECANADIAN ENERGY RESEARCH INSTITUTE
.44•••••,,
Volume 38, Issue 8
August 2016
307818256/
II11/4
eopolitics
of Energy®
Editorial Committee
Paul Kralovic
Dinara Millington
Megan Murphy
Allan Fogwill
Advisory Board
Kimble Ainslie
Yasser Al-Saleh
Anis Bajrektarevic
Fred Banks
Fatih Birol
John Brunton
Michael Charokopos
Zachary Cuyler
Athanasios Dagoumas
Alberto Cisneros Lavaller
Napier Collyns
Floros Flouros
Herman Franssen
leda Gomes
Antoine Halff
David Howell
Wenran Jiang
Larry Kaufmann
Mikhail Krutikhin
Vadim Loktionov
Michael Lynch
Keun Wook Paik
Petra Posega
David Pumphrey
Adnan Shihab-Eldin
Paul Sullivan
Eric Switzer
Paul Tempest
Geopolitics of Energy was founded by the late Melvin A. Conant of Washington, DC in 1979.
Since 1993, it has been published under the auspices of the Canadian Energy Research Institute.
All views expressed in this journal are those of the individual authors and do not reflect the views
of the Canadian Energy Research Institute.
Sino-Russian Oil and Gas Cooperation:
Where it Stands and How Far Can it Expand?
Professor Keun Wook Paik
Over the last two decades, Sino-Russian oil and gas cooperation has witnessed many ups and
downs. While Russia was prioritizing the short term tangible result, China was consistently
focused on the long term and fundamental target. Initially Russia did not take China very
seriously as China's market was premature to carve out or divert Russia's sizable fossil fuel
supplies to the lucrative European market. Even though Russia is placing its highest priority to
its pivot to Asia policy, it will take a long time for the actual volume from Asian markets to
reach two thirds of European markets. Despite the slow progress of Asian market expansion,
there is no doubt Asian markets will play a very important role for Russia's oil and gas exports
in the coming decades. China was and is confident that its massive market will offer a real
leverage for its negotiations with Russia and is still sticking to its value chain development
strategy, as shown very clearly in China's pipeline gas imports from the Central Asian Republics.
One thing for certain, oil and gas cooperation between Russia and China was and is being
expanded.
Since May 2014, when the breakthrough of the Sino-Russian gas deal was made, the most
frequently asked questions the author received are:
• Why is Beijing slow in terms of expanding the crude pipeline between Skovorodino-
Daqing?
• Whether or not CNPC will take the 19.5% of Rosneft equity stake?
• How will Russia's India card affect the Sino-Russian oil and gas cooperation?
• Will Gazprom construct the Power of Siberia 1 gas pipeline as scheduled or is a significant
delay inevitable?
• Why Beijing did not offer sizable financing for Power of Siberia (POS 1) development?
• Why Beijing threw a life line loan for Novatek's Yamal LNG?
• Why is Gazprom so desperate to accelerate the Altai gas export deal with Beijing, when the
progress on the POS 1 construction is so slow?
• What is the position of both Japan and Korea towards Sino-Russian oil and gas
cooperation?
A recent and very well researched OIES paper by James Henderson and Tatiana Mitrova
explains where Sino-Russia's oil and gas cooperation stands and it also offers some hints on the
questions mentioned above.' The paper's verdict on the status of energy relations between
Russia and China follows:
"... There is no doubt that Russia's pivot to Asia is certainly taking place (the evidence
from the oil sector alone is enough evidence of this), we have characterised the
developing energy relationship between Russia and China as akin to "playing chess with
the Dragon", by which we mean to imply that from a Russian perspective it is playing a
complex and high risk game with a powerful adversary. China, with its much larger
economy, its financial firepower and the benefit of Russia's weakened geo-political
status seems set to control the energy relationship with its northern neighbour.
However, Russia is not without strengths of its own and is attempting to exploit them
wherever it can. China does need Russian oil, and wants access to the Russian Arctic.
Over time (perhaps a decade) it may also come to need Russian gas in great quantities.
Nevertheless, with the oil and gas markets becoming more global in nature, it is
unlikely that Russia will be able to exploit these opportunities on anything other than
competitive terms. The reality is that its assets are, to an extent, stranded in the East
with China as their prime market, and as such their output is unlikely to command a
GEOPOLITICS OF ENERGY/AUGUST 2016 2
premium price, given China's alternative options. As a result, in order to fully benefit from
its energy connection to the East, Russian companies need to create their own
diversification options. Rosneft and Novatek have started to do this to a limited extent. It
is now time for Gazprom to show the same levels of flexibility, or potentially face
significant consequences for its future in the Russian gas sector."
Surely Russia's pivot to Asia policy is in full swing, but the most important question is whether Sino
-Russian oil and gas cooperation will move into the strategic level. No easy answer exists. Last
year, my OIES paper which updated my 2012 OUP book2 had tried to address this difficult
question. There are two very important milestone indicators. The first is from the gas sector, that
is, the conversion of the Altai MOU into a binding agreement. The second is from the oil sector,
that is, the allocation of Rosneft's 20% equity to CNPC or China's investment in Russia's strategic
reserves with over 50% ownership. The combination of both deals will be powerful enough to
upgrade the Sino-Russian oil and gas cooperation into the strategic level. Strategic cooperation is
a term which, for Russians and Chinese, means a partnership which transcends commercial
business. It involves not just the sale and purchase of energy, but mutual investment in resources
and companies and tailoring projects to the future plans of both parties in the energy sector.3
During the last 15 months, was there any significant change that signals the strategic level
cooperation between Russia and China's oil and gas cooperation? The short answer is that there
was no breakthrough of Altai gas export to China and no CNPC acquisition of Rosneft's 19.5%
equity materialised. Nonetheless, there are a number of important initiatives that will broaden the
scope and enhance the level of oil and gas cooperation. This paper aims at addressing the key
initiatives.
During the recent visit by President Putin to Beijing in late June 2016, President Xi Jinping
highlighted that the year 2016 marked the 15th anniversary of the China-Russia treaty of
friendship and hoped the two countries might remain "friends forever". President Xi said that
"President Putin and I equally agree that when faced with international circumstances that are
increasingly complex and changing, we must persist even harder in maintaining the spirit of the
Sino-Russian strategic partnership and cooperation".4
President Putin said the Russian-Chinese commission on investment cooperation has selected 58
commercial initiatives for implementation (some of them are listed below) which require a total
investment of $50 billion.
• Rosneft and Sinopec have agreed to make a final decision by September regarding the Chinese
company participating in the project to develop the Yurubcheno-Tokhomskoye field by
acquiring a 49% stake in East Siberian Oil and Gas Company;
• Rosneft and Beijing Enterprises Group (BEG) signed an agreement on cooperation within the
framework of Verkhnechonskneftegaz (VCNG). Rosneft had reached agreement with BEG on
the principal terms and conditions of the potential sale of a 20% stake in VCNG. The parties
expect to sign binding agreements on the matter not later than the fourth quarter of 2016;
• Chinese national chemical corporation ChemChina will acquire 40% of Rosneft's Far East
Petrochemical Company (FEPCO) project;
• Rosneft and China's Shandong Kerui Petroleum Equipment signed a memorandum of
understanding on strategic partnership in the area of petroleum services;
• Rosneft and China Petrochemical Corporation (Sinopec Group) plan to build a facility to
process annually five billion cubic meters of gas and three million tonnes of polymers in
Boguchany in East Siberia. The annual capacity of the new complex near the administrative
center of Boguchany District will be 5 bcm of gas yielding up to three million tonnes of
polymers and petrochemical products primarily for sale on the Russian and Chinese markets.
The resource base of the project comprises Rosneft oil and gas fields of YurubchenoTakhomskoye
cluster in East Siberia; and
• The Russian-Chinese dialogue in the gas sector is encompassing new areas. The cooperation in
the area of underground storage and power generation will facilitate the further deepening of
3 GEOPOLITICS OF ENERGY/AUGUST 2016
cooperation between the companies and the significant improvement of the
environmental situation in Chinas
Taas-Yuriakh Saga:
Russia's China vs.
India Card
It remains to be seen how many initiatives will be converted into meaningful transactions, well
beyond the media plays. It is worth pointing out that the boundary of negotiations among the
flagship NOCs from Russia and China — like Rosneft-CNPC, Rosneft-SINOPEC, Gazprom-CNPC —
is already being redrawn and expanded. The cooperation in upstream, midstream and
downstream is being opened to other big state-owned institutions from Russia and China, and
the expansion is set to continue.
However, the unexpected deal between Rosneft and BGG6 in June 2016 was a big surprise.
Without knowing the background of the Taas-Yuriakh saga in March 2016, it could be seen as
one of many deals between the two countries. The deal is very important and the implications
are not small. On March 16, 2016, Russia's Rosneft OJSC agreed to sell bigger stakes in its
Siberian oil assets to Indian state-run energy companies, including a $1.28 billion share to a
consortium of Indian producers. The group of three Indian companies took a combined 29.9%
share in Taas-Yuriakh Neftegazodobycha and a 23.9% stake in Vankorneft.7 In April 2016, an
article gave quite convincing details on Rosneft's negotiations with BGG saying that "According
to Russian RBC, Rosneft was yet again trying to undermine Gazprom's gas export monopoly,
this time on the eastern front. RBC's sources said that several rounds of negotiations have
already passed, with the last one taking place during Rosneft president Igor Sechin's visit to
Beijing mid-March 2016".$ It touches on the sensitive issue of third party access to the POS and
the assumption is Rosneft will not give up the attempt to dismantle Gazprom's monopoly on
POS. That is, the core of this deal is the access of independent gas producers into the POS
pipeline, when Gazprom is determined to sustain a "single export channel". This has been
recorded in the protocol of the presidential committee that took place in October 2015.
It is difficult to understand and explain why Rosneft has quickly decided to sell the asset to the
Indian consortium rather than the Chinese investor that can offer a huge gas market directly. It
is worth noting that BGG as the main supplier of gas to Beijing and Hebei province was at the
final stage of its due diligence to buy 20% in the Taas-Yuriakh oil and gas field out of a 29%
interest that was set aside for Dubai-based Skyland Petroleum.9 It is also worth noting that
Skyland Petroleum has played a very important role in persuading and convincing BGG to take
the 29.9% equity jointly to make sure BGG could access the direct gas supply from east Siberia
via the POS gas line. The initiative of taking 29.9% equity by BGG/Skyland Petroleum could give
maximum benefit to the gas consumers in northern China as BGG can effectively reduce the
import border price based on their equity stake in the target upstream project. In fact, this was
the type of equity investment model CNPC had dreamed of achieving with regard to the POS 1
gas line development. While Gazprom has been firmly rejecting the opening of the upstream
for CNPC, Rosneft was willing to use the carrot of opening the upstream sector to China's
biggest gas consumer.
However, Rosneft's hurried decision to use the India card in March 2016 has caused confusion.
It seems that the Indian consortium had assumed Rosneft had already signed a long term gas
supply deal with BGG based on the Taas-Yuriakh field, considering that people close to the deal
were questioning the wisdom of the Indian deal by mentioning that the Indian consortium had
asked about the existence of gas SPAs between Rosneft and BGG right after the deal
announcement in mid-March.
Rosneft could have allocated the Verkhne-Chonsokye field (with C1+C2 reserves, 173 mt of oil
and condensate and 115 bcm of gasn, instead of the Taas-Yuriakh field, which is a part of the
Sredne-Botuobinskoye oil, gas and condensate field (with 167 mt of oil and condensate and
181 bcm of gas) to the Indian consortium.11 It is safe to say that the Indian consortium was
forced to take the Taas-Yuriakh field asset first while BGG was finalising the due diligence. Due
to the collapse of the Rubles value, Rosneft's top management was under pressure to minimise
GEOPOLITICS OF ENERGY/AUGUST 2016 4
the debt scale and the hurried sales of the assets was the priority.12 This may explain indirectly
why the hurried deal with the Indian consortium became the priority. Besides this, Rosneft had to
show that Russia's flagship oil firm cannot bank on one partner and should build partnerships with
several different players to choose from several options.
In short, Moscow really wanted to show that Russia's pivot to Asia policy is not solely dependant
on the China market. That may be the case when it comes to the oil sector business, but for the
Indian consortium there was no synergy whatsoever when it comes to the gas sector side of the
deal. Rosneft had almost lost the biggest gas consumers in China by prioritising the half-baked
deal with the Indian consortium in March 2016. This explains the unexpected Verkhne-Chonskoye
deal with BGG announced in June 2016 as Rosneft cannot afford to lose the gas market being
offered by BGG. More importantly for the Verkhne-Chonskoye deal with BGG is the fact that the
US$12 billion loan from China's policy banks like China Development Bank and China Exim Bank
was made in late April 2016. Moscow had to find an alternative of Taas-Yuriakh for BGG, which
was backed by the Beijing authority.
Before moving into the loan for gas issue, it is worth noting that Gazprom's rigid stance towards
its upstream opening in east Siberia or west Siberia looks unlikely to change that easily. The
breakthrough of overly advertised Altai gas supply (or POS 2) to China may take much more time
than Gazprom would like. Interestingly, Russian analysts argued that in consideration of the
financial burden of POS line construction, the best course of action for Gazprom right now would
be to find the least costly method of backing out of the contract. The second best option would be
to invite Chinese contractors to march into East Siberia and build the pipeline at what would likely
be much lower costs than the Russian company could offer.13 The very best solution for Gazprom
is to get the loan from Beijing for the POS construction, not the backing out of the contract.
China's Loan for Gas Since the May 2014 POS 1 gas line deal, the loan for gas for Novatek's Yamal LNG became the
Initiative most important development for Sino-Russian oil and gas cooperation. To understand what drove
Beijing to this loan for gas initiative, we need to look into Beijing's stance towards global climate
change, China's gas expansion plan, and the South China Sea boundary dispute and regional
multilateral gas cooperation.
Fossil Fuel's In early June 2015, the Group of Seven industrial powers agreed the world should phase out fossil
Phase-Out? fuel emissions this century, in a move hailed as a historic decision in the fight against climate
change.14 In the same month, China made very clear that it would aim to cut its greenhouse gas
emissions per unit of gross domestic product by 60-65% from 2005 levels under a plan submitted
to the United Nations ahead of crucial climate change talks in Paris in December 2015. China plans
to increase its installed capacity of wind power to 200 gigawatts (GW) and solar power to around
100 GW, up from 95.81 GW and 28 GW as of 2015, respectively. It will also increase its use of
natural gas which is expected to make up more than 10% of its primary energy consumption by
2020, while it would increase the share of non-fossil fuels as part of its primary energy
consumption to about 20% by 2030.15
These announcements were clearly supporting the binding commitment to tackle the global
climate change issue during the 2015 Paris conference. The Paris agreement confirmed the target
of keeping the rise in temperature below 2°C. It therefore asked all countries to review these
contributions every five years from 2020; they will not be able to lower their targets and are
encouraged, on the contrary, to raise them. As a way of saving the momentum, in 2016 the G7
meeting in Japan set a deadline for ending most fossil fuel subsidies, pledging to end government
support for coal, oil and gas by the end of 2025.16
A big question is how effective it will be without Asia's big coal consumers' commitment to the
drastic reduction of their coal use. BP Energy Outlook 2016 predicted that by 2035 China will still
consume 50% of global coal demand.12 A drastic step, rather than the business as usual step,
should be taken to reduce China's dependence on coal, and the most ideal solution is
maximization of gas use by China.
5 GEOPOLITICS OF ENERGY/AUGUST 2016
During the BP Statistical Review of World Energy 2016 announcement in June 2016, BP's Group
chief economist Spencer Dale said that the path of renewable energy in the base case of the
Energy Outlook implies a quicker pace of penetration than any other fuel source in modern
history. But even in that case, renewable energies within primary energy barely reach 8% in 20
years' time. The simple message from history is that it takes a long time — numbering several
decades — for new energies to gain a substantial foothold within global energy.18 It is warning
that without a drastic reduction of dependence on coal by Asian countries, in particular China
and India, any initiative by OECD countries for the fossil fuel phase out will have very limited
impact.
China's 13th FYP and In early March 2016, China announced that a total energy consumption cap of 5 billion tonnes
the Role of Gas of coal equivalent comes after the success of the 12th Five-Year Plan from an energy
perspective, in which energy and carbon targets were met and surpassed. Between 2011 and
the end of 2015, energy intensity (i.e., energy consumption per unit of GDP) fell by 18.2
percent and carbon intensity declined 20 percent. These declines are due in large part to the
drop in coal consumption: down 3.7 percent in 2015, following a 2.9 percent decrease in 2014.
The slowed consumption suggests that achieving a 5 billion metric tonnes energy cap may not
be challenging.19 It is a clear reflection of complacency among the Chinese energy planners,
and it was a big disappointment that there was no sign that Beijing energy planners were
taking steps to strengthen the importance of natural gas in China's energy mix.
The Need to Move
from Loan for Coal to
Loan for Gas
In an article placed on Trusted Sources website, Stephen O'Sullivan correctly pointed out that
gas prices need to fall further to improve Asia's environment.20 The point was that one of the
key routes to improving Asia's physical environment is the replacement of coal in power
generation by natural gas....Price alone is unlikely to persuade energy users to switch to a more
environmentally friendly fuel like gas... As in Japan and Korea, China plans to introduce a
carbon trading system in 2017, although there is no clear view on what the price is likely to
be... The most promising solution to achieve governments' aim of fuel switching and
environmental improvement is the introduction of an effective carbon pricing mechanism,
which raises the price of coal sufficiently to allow gas to be competitive in the power
generation market. Politically and technically, however, this could be a complex and lengthy
challenge across Asia.
There are many factors that will shape China's energy future but this author sees two factors
that are fundamentally important. The first is the drastic reduction of coal share in China's
energy balance well below 50% by 2030, and the second is a rapid expansion of natural gas use
with China's bold initiative for the conversion of LNG as a global commodity. At present,
however, China is pursuing a kind of status-quo approach for fossil fuel industry's phase-out. If
China takes a bold and innovative step to maximize the diversification of global LNG supplies, a
big change of global LNG supply pattern will be possible, even though China alone cannot
introduce the major change. The revolutionary change can be materialized only when the three
main gas importers of Northeast Asia — like Japan, Korea and China — agree to cooperate for
the new model of global LNG supplies.
According to a recent GEGI study, Chinese development banks have provided upwards of
US$28 billion in financing for global coal projects — projects that accentuate climate change and
social risks. Using conservative estimates of the climate and local health costs of coal plant
emissions, the study authors calculate that the yearly social cost of Chinese overseas coal-fired
power plants amounts to US$29.7 billion. Assuming a power plant lifetime of 30 years, total
social cost could range from US$117 billion to $892 billion.21 It confirms that China's energy
loans are highly concentrated in fossil fuel extraction and power generation, especially coal.
In the same month, a study by CIERP under the Fletcher School, Tufts University elaborated
that between 2001 and 2016, Chinese financial institutions supported the construction of more
than fifty coal-fired power plants abroad. A majority of these power plants (58%) used subGEOPOLITICS
OF ENERGY/AUGUST 2016 6
critical coal technology, which is the most energy inefficient form of a coal-fired power plant, and
therefore the type that is most carbon intensive, and almost all of the rest were super-critical
plants, which are approximately twelve percent more efficient than sub-critical plants. On an
annual basis, this fleet of more than fifty coal-fired power plants is estimated to release 594
million tonnes (mt) of CO2, which is equivalent to 11% of total US emissions in 2015 and 6% of
total Chinese emissions in 2014 (latest year available). Taken together, China's policy banks (like
China Development Bank and China Export and Import Bank) financed overseas coal plants that
would become the eighth largest emitter of carbon dioxide emissions, more on an annual basis
than Canada, Brazil, Saudi Arabia, or the United Kingdom. If a 30-year lifetime of these plants is
assumed, these plants will cumulatively emit 17,828 mt CO2, equal to more than triple total US
emissions in 2015, 1.5 times Chinese emissions in 2014, or slightly more than US and Chinese
emissions combined on an annual basis.22
If part of this financing is allocated for the loan for gas, its impact for China's gas supplies will not
be small. Interestingly when the above study was published, China already made the decision to
make the loan for gas for the Yamal LNG project in late April, and in May China decided to finance
85 percent of Pakistan LNG terminal and pipeline projects. The deal was signed between
Pakistan's Inter-State Gas System (ISGS) and CNPC. China Petroleum Pipeline Bureau (CPP) will
construct the pipeline and will also build an LNG terminal at Gwadar. The project cost is
approximately US$2.0 billion.23
A Bold Loan for Gas
Initiative for
Yamal LNG
On April 29, 2016 in Beijing, Yamal LNG signed credit agreements with Export-Import Bank of
China (China Exim Bank) and China Development Bank in the amount of 9.3 billion euros and 9.8
billion yuan for 15 years. The firm said in a statement that the interest rates for the credit lines
are EURIBOR 6M +3.3% per annum for the period of construction and 3.55% after the full
commissioning of Yamal LNG, and SHIBOR 6M +3.3% and 3.55% per annum, respectively. Earlier in
the framework of raising project financing, 150 billion rubles were received on a return basis from
Russia's National Welfare Fund (NWF), and an agreement was signed with Sberbank and
Gazprombank about the provision of a credit line in the amount of 3.6 billion euro for 15 years.
Yamal LNG CEO Yevgeny Kot said: "The project is being implemented in accordance with the
confirmed schedule, the first train of the LNG plant is 65% ready, and we are in the most intense
stage of construction and installation work. The signing of the agreements with the Chinese banks
is allowing us to implement the project without raising additional funds from shareholders".24
During the June 2016 Saint Petersburg Economic Forum, Novatek boss Mikhelson confirmed that
the partners in the Varna! LNG project — Total, CNPC and Silk Fund — showed interest in the
development of the projected Arctic LNG. Mikhelson added a technological concept for the
project is due to be completed in the course of 2016. This will include LNG output capacity,
licenses and equipment. Michelson elaborated the capacity of the projected plant could be six
million tons of LNG per year. The first production phase project could be launched in the year
2022, followed by a second and third phase in 2024 and 2025, respectively. Novatek said that
while the production from Yamal LNG is based on long-term supply contracts with customers, the
gas from the Arctic LNG will be sold on the spot market. The Arctic LNG plant will be based on
resources from the Gydan Peninsula and the Salmanovskoye and Geofizicheskoye fields, both
located on the eastern bank of the Ob Bay.25
If the loan for gas is applied to Arctic LNG development, there will be a good chance for other
frontier gas development projects with the Chinese equity investment being the beneficiary of the
switch from loan for coal to loan for gas. A good potential example will be Mozambique gas in
east Africa.
7 GEOPOLITICS OF ENERGY/AUGUST 2016
Projection on LNG
Supply Glut and
Initiative of Asia Gas
Consumers Alliance
Many LNG producers and developers are paying attention to the LNG supply glut projected to
last until the early 2020s. In a paper presented at the LNG 18 conference, the authors argue
that substantial amounts of LNG supply will reach the market by 2020 that may well exceed
Asia's appetite for LNG, which had relied mostly on increasing demand from China, India and
Southeast Asia, presenting uncertainties in terms of growth due to price sensitivity. The
flexibility of some new supplies, notably from the United States, means that many companies
may be left with large amounts of surplus LNG.26
What drove Beijing to take such a bold initiative for loan for gas, despite the above mentioned
LNG supply glut projection? First, One Belt One Road (OBOR) is a key area where China needs
Russia's cooperation. Beijing had to offer a life line for Yamal LNG to make sure China's OBOR
initiative will be fully and effectively supported by Russia. When Asia became a battle ground
between the US pivot to Asia and Russia's pivot to Asia, and US LNG supply to Asia became a
reality in 2016, Beijing had to support the timely start of Yamal LNG supply from 2017.
Provision of sizable financing was what Russia was praying for.
Secondly, from Russia's perspective, strengthening energy ties with China and India would
serve Putin's geopolitical interests further, while also stealing market share from the Saudis
and the US. From Beijing's view point — as pointed out by Mark McNamee, Central and Eastern
Europe analyst at Frontier Strategy Group — of far more importance is the political support
Russia offers, regarding foreign policy matters at the United Nations, Group of 20 and other
venues ... China, naturally, is happy to have a useful ally as it seeks to reform the existing USled
order to attain its geopolitical goals.27
It is worth noting that on July 12, 2016, the Permanent Court of Arbitration in The Hague (PCA)
ruled in the Philippines' favor in a maritime dispute with China concerning the South China Sea.
Beijing questioned the Court's jurisdiction over the case and stated it would not accept nor
participate in the arbitration. In turn, the PCA, citing the United Nations Convention on the Law
of the Sea (UNCLOS), asserted that China, an UNCLOS signatory, is bound by its ruling. Chinese
officials' reactions to the ruling by PCA on the South China Sea could have wide-ranging
implications for China's Silk Road, the economic initiative China considers to be a top national
priority.28 China will seek implicit support from Russia. In particular, as the intensified situation
of the South China Sea's territorial dispute cannot be ruled out, Beijing leadership is chasing
the alternative oil and gas supply routes to diversify the oil and gas supply route via the Arctic
Sea Lane. Beijing's solid stance towards the POS gas line development can be explained by
Beijing's serious interest in diversifying the supply routes.
Thirdly, China is sharing the view that cooperation among Asian gas consumers is necessary, if
the common goal is to reduce the imported LNG price burden and to diversify the supply
routes. Asia's gas consumers do not wish to take expensive LNG, even if the only alternative is
'dirty' coal. This is why the three main gas importers aim at forming an alliance which could
play a pivotal role in lowering the development cost of new LNG supply sources by introducing
a new financing format based on the sovereign funds' provision. If the global LNG supply
volumes are balanced by the market and controlled due to the delay of the new supply
projects, Asian gas consumers will have no leverage whatsoever against the controlled global
supply volume. Japan learned of the excessive financial burden from the expensive LNG in the
wake of the 2011 Fukushima disaster.
It was no surprise when Japan's JERA Co. said in late February 2016 that it is in talks with other
LNG companies to create an alliance of buyers that account for more than one third of global
trade. Hiroki Sato, vice president of the fuel department of JERA — a joint venture between
Tokyo Electric Power Co. and Chubu Electric Power Co. — said that "JERA is seeking to
cooperate with Kogas and CNOOC on LNG procurement and investment...The deal will benefit
smaller companies outside the group as lower prices would be passed on to other buyers. The
GEOPOLITICS OF ENERGY/AUGUST 2016 8
alliance members would also be able to swap or trade cargoes among themselves to help balance
supply between their operations".29
JERA's initiative will be very effective, if it is combined with China's bold step to introduce the real
leverage to influence global LNG supply options. Generally speaking, there will be a rapid slowdown
of greenfield LNG project development if the return rate of investment for the new gas
supply development is not attractive enough and the oil price is not high enough. This will be a
recipe for the typical repeat of boom and bust cycle. Assuming the depressed oil price is
maintained, it is a golden opportunity to take the initiative to diversify the LNG supply hubs, based
on Asian consumers' sovereign funds financing for the development of new LNG supply hubs. That
is, the question of how to make natural gas become more widely traded and consumed lies in the
balancing act between the interest of producers and consumers.
India recently urged the cooperation of gas consumers in Asia. On June 14, Dharmendra Pradhan,
Indian minister of petroleum and natural gas said that "For the next two to three decades, gas is
going to be a major part of the energy basket for Asian energy consumers. We want to bring
together the countries and form a network which can together source reasonable, rational and
affordable LNG, adding that talks with Japan and South Korea have begun and China may also
come onboard as a partner". India's state-owned GAIL Ltd. is spearheading the talks, which follow
a similar attempt in 2013, on India's behalf.39 This announcement made by India rather than China
was a pleasant surprise, but was a kind of indirect confirmation that the environment to form
Asia's Gas Consumers Alliance (AGCA) ripens.
In short, the introduction of a loan for gas option by Beijing authorities can cover the issues of
reducing China's coal dependence, diversifying the gas supply routes, and promoting cooperation
among gas consumers in Asia simultaneously. In this context, the level of importance by Beijing to
apply a loan for gas option in Sino-Russia's energy cooperation should not be under-estimated.
Still, Sino-Russian oil and gas cooperation has not reached the strategic level of cooperation as
CNPC's acquisition of Rosneft's 19.5 percent equity has not materialized and CNPC's compromise
with Gazprom for the Altai gas (or POS 2) supply to China is not made, but the provision of a
US$12 billion loan for the Yamal LNG development has opened a new chapter of the cooperation
pattern between Russia and China. The impacts of this loan for gas initiative will be getting bigger
once the duplication of this initiative is made for other frontier gas developments. Time will tell
how far it can go.
About the Author
Prof. Keun Wook Paik is Senior Research Fellow, OIES and Associate Fellow, Chatham House
Endnotes
1James Henderson and Tatiana Mitrova, "Energy Relations between Russia and China : Playing Chess with the Dragon",
OIES Paper, WPM 67, August 2016. https://www.oxfordenergy.org/wpcms/wp-content/uploads/2016/08/Energy-
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2Keun Wook Paik, Sino-Russian Oil and Gas Cooperation : The Reality and Implications (Oxford : Oxford University Press,
2012).
3Keun-Wook Paik, "Sino-Russian Gas and Oil Cooperation : Entering a New Era of Strategic Partnership?", OIES Paper,
WPM 59, April 2015. http://www.oxfordenergv.org/wPcms/wp-content/uploads/2015/04/WPM-59.pdf
4https://www.theguardian.com/world/2016/jun/26/friends-forever-xi-talks-up-chinas-ties-with-russia-during-putin-
trade-trip
sInterfax Russia & CIS Oil and Gas Weekly, June 23-20, 2016, pp. 4-8 ; Dina Khrennikova, Elena Mazneva and Stephen
Bierman, "Rosneft's Sechin Says China Ties Boosted With New Deals, Routes", Bloomberg, June 26, 2016. http://
www.bloomberg.com/news/articles/2016-06-26/rosneft-s-sechin-says-china-ties-boosted-with-new-deals-routes ;
https://www.rosneft.com/press/releases/item/182765/ ; https://www.rosneft.com/press/releases/item/182761/ ;
https://www.rosneft.com/press/releases/item/182759/; https://www.rosneft.com/press/releases/item/182753/;
https://www.rosneft.com/press/releases/item/182749/.
6Chen Aizhu, "Beijing Gas Starts importing spot LNG from French utility", Reuters, September 23, 2015.
http://af. reuters.com/article/commoditiesNews/idAFL4N11S2AQ20150923 ; http://interfaxenergy.com/gasdaily/
article/20773/beijing-gas-group-targets-20-bcmy-to-beijing-by-2020 ; http://www.bigas.com/GroupView.aspx (in
9 GEOPOLITICS OF ENERGY/AUGUST 2016
Chinese)
7r/
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10-16, 2016, pp. 19-20.
9http://www.economiccalendarcom/2016/04/07/rosneft-tries-to-break-gazproms-monopoly-using-china/
9Nelli Sharushkina, Nadezhda Sladkova, and Michael Ritche, "China's Interest in Rosneft Stake Dented by Indian
Deals", Nefte Compass, April 28, 2016.
°frrips://www.rosneft.com/press/releases/item/182759/
"Interfax Russia & CIS Oil and Gas Weekly, March 10-16, 2016, pp. 19-20.
12http://www.reuters.com/article/russia-rosneft-results-idUSL8N13K1E120151125
13Alex Fak and Valery Nesterov, "Russian Oil and Gas —Trimming the Belly Fat", Sberbank CIB Investment Research,
February 2016, quoted in Tatiana Mitrova, "Shifting Political Economy of Russian Oil and Gas", CSIS Energy and
National Security programme, March 2016, p. 44.
14Pilita Clark and StafanWagstyl, "G7 leaders agree to phase out fossil fuels", Financial Times, June 8, 2015. -it'cp://
www.ft.com/cms/s/0/ec2c365a-Oddf-11e5-aa7b-00144feabdc0.html#axzz4B6DRCwSV
"Jennifer Duggan, "China makes carbon pledge ahead of Paris climate change summit", The Guardian, June 30
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un-paris-climate-change-summit
1.6h.tt
ps://climatechange-theneweconomv.com/2016/05/31/g7-leaders-declaration-addresses-paris-agreement/ ;
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12http://www.bp.cornicontent/dam/bp/pdf/energy-economics/energv-outlook-2016/bp-energy-outlook-2016.pdf
19http://www.bp.com/content/dam/bp/pdf/energy-economics/statistical-review-2016/bp-statistical-review-of-world
-energy-2016-spencer-dale-presentation.pdf
19https://www.chinafile.com/reporting-opinion/environment/how-chinas-13th-five-vear-plan-addresses-energv-and
-environment
20. ..
nu p://www.trustedsources.co.uk/blogs/energv/gas-prices-need-to-fall-further-to-improve-asia-s-environment
21Kevin P. Gallagher, Rohini Kamal, and Yongzhong Wang, "Fueling Growth and Financing Risk : The benefits and risks
of China's development finance in the global energy sector", GEGI (Global Economic Governance Initiative) Working
paper 002, 05/2016. http://www.bu.edu/pardeeschool/files/2016/05/Fueling-Growth.FINAL .version.pdf
22Kelly Sims Gallagher, "The Carbon Consequences of China's Overseas Investments in Coal", CIERP (The Center for
International Environment & Resource Policy), May 2016. http://fletcher.tufts.edutimedia/Fletcher/Microsites/
CIERP/Publications/2016/CIERPpb ChinaCoal HiRes.pdf ; Sabina Snell, "China's Development Finance : Outbound,
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23http://www.naturalgasasia.com/china-offers-to-fully-finance-pakistan-Ing-terminal-pipeline-prolects-18500
24Russia & CIS Oil and Gas Weekly April 28 — May 4, 2016, p. 9 ; Russia & CIS Oil and Gas Weekly, April 28 — May 4,
2016, p. 9 ; Neil Buckley, "Sino-Russian gas deal : smoke without fire", Financial Times, May 11, 2016. http://
www.ft.com/cms/s/0/eea4f2ec-16c0-11e6-b197-a4af20d5575e.html# James Marson, "Russian Natural-Gas Project
Gets Funding from China : Move is a hard-fought victory over western sanctions", Wall Street Journal, April 29,
2016. http://www.wsi.com/articles/russian-natural-gas-proiect-gets-funding-from-china-1461934776
25Atle Staalesen, "Big interest in new Arctic LNG — Novatek", The Barents Observer, June 20, 2016. http://
thebarentsobservercom/2016/06/big-interest-new-arctic-Ing-novatek
26Anne-Sophie Corbeau and David Ledesma presented a paper titled "LNG Markets in Transition : The Great
Reconfiguration", at LNG 18 Conference held in Perth during April 11-15, 2016.
27Nyshka Chandran, "Putin turns to Xi as Russian economy stumbles on sanctions, oil price drop", CNBC, June 22,
2016. http://www.cnbc.com/2016/06/22/putin-turns-to-xi-as-russian-economv-stumbles-on-sanctions-oil-price-
drop.html
28Christine Guluzian, "Does the South China Sea Spell Trouble for Beijing's New Silk Road?", National Interest, August
16, 2016. http://nationalinterest.org/feature/does-the-south-china-sea-spell-trouble-beijings-new-silk-17376 ; David
Tweed, "Xi's Neighborhood Diplomacy Runs Aground in South China Sea", Bloomberg, July 14, 2016. http://
www.bloomberg.cominews/articles/2016-07-141xi-s-neighborhood-diplomacy-runs-aground-in-south-china-sea ;
Feng Zhang, "Beijing's Master Plan for the South China Sea", Foreign Policy, June 23, 2015. http://
toreignpolicy.con-1/2015/06/23/south china sea beiiing retreat new strategy/
29JERA has said the combined Tokyo Electric and Chubu Electric purchases would be about 40 mt a year of LNG.
Kogas imported 31.4 mt in 2015 and CNOOC imported 14.1 mt in 2014, according to the companies.http://
www.bloomberg.com/news/articles/2016-02-25/biggest-Ing-buyers-seek-alliance-to-boost-bargaining-power
30Promit Mukherjee, "India seeks better LNG deal by teaming up with South Korea and Japan", Reuters, June 15,
2016. http://www.reuters.com/article/india-energyidUSL4N196406
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