From Russia, with trepidation: will China sign a new gas deal to feed its energy needs?

The Ukraine war is complicating the calculus of China’s energy security and the prospect of a new energy deal with Russia
Can Beijing afford to be close to a Moscow that is increasingly politically and economically isolated?

Yunis Sharifli

Published: 3:30am, 31 Mar 2022

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Two recent developments reveal the possibility of a new energy agreement between China and Russia. First, Russian gas giant Gazprom PJSC announced a contract to design the Soyuz Vostok pipeline across Mongolia towards China. Second, Beijing is reported to be discussing with its state-owned companies opportunities to buy stakes in Russian energy companies, and is also looking at a Power of Siberia 2 pipeline to China.

With the exit of international energy companies from Russia following its invasion of Ukraine, Germany’s decision to halt the certification process of the Kremlin-backed Nord Stream 2 pipeline, and rounds of sanctions on Russia, there are certainly new opportunities for the Chinese government and companies to strengthen their position in the Russian market.

However, even as domestic, regional and global factors may push China towards a new energy deal with Russia, Beijing could also face a range of challenges.

Firstly, Beijing’s ambition to be carbon-neutral by 2060 and replace much coal with gas is one of the most important domestic factors prompting China to further improve its relations with Russia.

Russian gas exports – whether liquefied natural gas or pipeline gas delivered through the original Power of Siberia, for example – would help China reduce greenhouse gas emissions as the country makes a green transition.

Secondly, the withdrawal of Western energy companies such as BP and Shell from Russia due to the Ukraine war creates opportunities for Chinese energy companies, especially state-owned ones, to invest in Russia and diversify their portfolio.

Thirdly, while China also imports gas from Turkmenistan, Russian gas is one of the cheapest options for Chinese consumers, making a new energy deal with Russia that much more attractive.

The China factor: why Russia is still betting big on oil

However, there could also be obstacles to such a deal. One problem could be the political and economic uncertainties now looming over Russia; the deterioration of the Russian business environment under current sanctions might discourage Chinese companies from investing in Russia.

Particularly, sanctions led by Washington seem to inspire caution in Beijing and Chinese companies. For example, the state-run Sinopec Group recently suspended talks about a major petrochemical investment and a gas marketing venture in Russia, apparently heeding a government call to tread carefully with Russian assets.

Another problem would be energy prices. In negotiations for past agreements, prices were one of the most difficult issues that Chinese and Russian companies had to discuss.

Besides, while China does not lack capital, it does not have the technological know-how to develop energy fields in Siberia. This may prove problematic in greenfield investment projects that involve expanding a business in another country, rather than buying one.

There are also regional factors that figure in China’s calculations. Uzbekistan recently decided to halt gas exports to China in order to meet domestic demand, following protests in neighbouring Kazakhstan over fuel prices. This could create challenges for China’s energy security and increase its dependence on other gas imports.

In Myanmar, the military has placed landmines around oil and gas pipelines that are connected to China’s Yunnan province to protect them, but the move only highlights China’s vulnerability. Thus, a deterioration in stability in surrounding countries is another factor that may prompt Beijing to seek new energy deals with Moscow.

Energy transport routes are another matter requiring long discussion. For example, in the context of the Power of Siberia 2 pipeline to China, Russia is aiming to export gas from the same fields in west Siberia that already feed the European Union. However, a situation that gives Russia an opportunity to create competition between the EU and China might not be entirely favourable to Beijing.

Of course, the calculus of energy partnerships is complex and China will also have to consider international factors.

Due to the Ukraine war, EU countries are moving to reduce their dependence on Russian gas imports, which could then intensify the competition for alternate supplies between Europe and Asia.

China imports about 40 per cent of its LNG from Australia and 10 per cent from the US, two countries with which its relations have been worsening. Furthermore, for these imports, China depends on maritime lanes where the US is the main security provider, a factor that might also threaten China’s sense of energy security.

China in ‘critical stage’ for energy security as Ukraine war ramps up risks

With regard to the West, a growing perception of the threat posed by the Sino-Russian partnership, and Russia’s increasing isolation from the international community in both diplomatic and economic terms, could cause complications for China.

As it is, China is under increasing international pressure because it has adopted a neutral position on the Russia-Ukraine war. This could very well prevent China from reaching a new energy agreement with Russia as it did back in 2014. Beijing would not want to fuel the European perception that the Chinese and Russians are getting too close. Nor would it wish for the transatlantic alliance to be revitalised against China and Russia.

To sum up, there are both driving forces and impediments for a new Sino-Russian energy deal. Going forward, China’s ties with the US, the Russia sanctions and the personal relationship between Xi Jinping and Vladimir Putin will be the deciding factors.

Yunis Sharifli is a research assistant at the Middle East Institute and junior research fellow at the Caucasian Center for International Relations and Strategic Studies