Working out new steps in dance with Russia

PUBLISHED : Tuesday, 19 July, 2011, 12:00am
UPDATED : Tuesday, 19 July, 2011, 12:00am

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China's upstream energy forays have become the stuff of folklore - carving out tracts of Central Asia, Africa and the Gulf in the desperate quest for hydrocarbon resources. Of course, Beijing's activities have been far more sophisticated than that, drawing on security and diversity of supply, and reducing price risk exposure. Gaps remain, but China is on the right track to leverage its position as the epicentre of demand growth. Or so we thought.

The Arab spring presented Beijing a problem that goes beyond street protests, all the way to Brussels. The Libyan impasse has been a harsh reminder that the US is tired of safeguarding Europe's energy interests, and the prospect of abundant supplies on Washington's doorstep - Canadian tar sands, Latin American presalt and the outer continental shelf - suggest the furthest Washington will go in future is directly over the pond to West Africa.

The downside of the end of US 'geopolitical dredging' is that Europe's hard-power projections are too soft for upstream players to rely on.

In Central Asia and the Gulf, where commercial agreements have always come with solid security guarantees, this matters. Unless it bulks up, Brussels will have to defer to Russia, which points to the nub of China's dilemma: on sheer volume alone, Beijing will have to source ever larger amounts of Russian energy as its core Eurasian supply.

Unless it can stop Europe going cap in hand to Moscow at the other end of the pipeline, it will not get Russian supplies on Chinese terms. If Russia manages to tighten its grip on Central Asia and starts playing off Eastern and Western markets, China's current hedging strategy might even collapse.

Like it or not, Beijing and Brussels are part of an energy menage a trois that includes a capricious Russian bride. How it plays out depends on China's willingness to encourage European upstream deals that would tie down Moscow and reduce the risk of price collusion between Russia and Central Asian producers.

Making Central Asian markets work for the EU might even help avert a Sino-Soviet power tussle for regional dominance. A similar logic applies in the Middle East, where a European demand cushion could attenuate Sino-US rivalries, and an increased elasticity of supply would narrow Russian and Central Asian bargaining positions, besides those of the Gulf suppliers.

Put very simply, if China wants to play off key suppliers, it must secure both ends of the consumer pipeline. Unless a bargain can be struck between consumers in the East and those left playing 'interdependent' energy games in the West, then both will be the worse for it. The time is ripe for a Beijing-Brussels energy pact.

Matthew Hulbert is senior research fellow at Clingendael International Energy Programme. Christian Brutsch is senior lecturer at University of Zurich