The imposition of western sanctions on Russia following the country’s occupation of Crimea in 2014 coincided with China’s heightened desire to diversify its energy imports. Russia’s search for alternative markets to diversify its export risks further gained momentum towards a closer energy relationship with China particularly after Sino-U.S. relations soured, and escalated into a trade war in recent months. Nevertheless, the majority of Russia’s gas trade is still conducted in Europe despite gains made in the Asian market.
In spite of the heavy sanctions on Russia, the ensuing economic downturn, the ongoing threat of the blockage of gas from the NordStream 2 natural gas pipeline for Russian gas to Europe, and with the limitation in transmission volumes from the TurkStream pipeline, Russia’s export volumes to Europe at the end of 2018 are forecast to break those set in 2017.
In 2017, two-thirds of the revenue from Russia’s gas giant, Gazprom, was dependent on the European gas market. The decline in Europe’s domestic production from the abandonment of shale gas extraction and stalled gas production in North Africa have all helped Russia’s case in accumulating spare supply capacity, which they can offer at costs that can competently compete with LNG in the global market.
However, as exports to the Western gas market are near to reaching their peak in an environment that is seeing rising antipathy towards Russia, the country’s leaders, in a bid to reduce their dependency on Europe’s dwindling market, have directed their focus towards Asia, and in particular China, which has relatively benign, political views towards Russia.
Failing Russian relations with the west, which have hit the lowest point in recent years, are not merely the only reason for Russia’s pivot towards Asia, but Europe’s limited energy infrastructure is also set to further restrain Russia’s desire to expand its market share in the region.
An example of the restraints to market expansion that Russia faces in Europe is evident given the fact that the EU Commission is contemplating taking legal action against Russia to slow down the NordStream 2 and similar projects citing that Russia is in contravention of the EU’s antitrust laws. These potential restrictions on transmission flows and the lack of adequate infrastructure are impediments in further strengthening Russia’s position in Europe. In addition, the recent adaptation of the EU’s decarbonization policy means the need for natural gas will eventually dissipate, if not in the short to medium term, but eventually over the long term. Therefore, Russian policymakers have to take into account the Europe-wide policy changes to mitigate the long-term risks of losing its share in this gas market.
While China used to import only marginal LNG volumes from Russia through one of the world’s largest integrated, export-oriented, oil and gas project, the Sakhalin 2, the recent shipment from the Yamal LNG terminal, the construction of the Power of Siberia gas transmission system to provide Russian gas to China, will increase China’s import volumes by up to 38 bcm in the 2020’s. Although a number of negotiations between Russia and China were held since 2004 on gas purchases, the real momentum was achieved in 2014 and great leaps forward were made since then. While many experts view this cooperation as a sign of Russia’s desperation and China’s attempt to use its bargaining power, the pendulum may just swing in Russia’s favor over the long term once these vital energy projects are completed and China’s rising demand for energy is met by Russia’s regular exports.
The slow rate of progress in gas imports in China pre-2004 has seen a massive change and inflated to reach 90 bcm as of 2017. Consequently, there is every indication that Russia’s share of China’s gas imports will grow steadily in the years ahead.
A recent gas contract worth $400 billion between the two major powers shows that both parties are ready to collaborate over the long term. With this agreement, Russia promised to supply China with up to 38 bcm of gas for a period of 30 years starting from the end of this decade. This major agreement is a sign to the West that Russia has other alternative markets that are ready to cooperate with the country and is a show of Russia’s defiance in the face of heavy sanctions.
Russia’s second LNG export facility, the Yamal LNG project, is considered another success story for Russia’s Novatek and for China. The project came to fruition, which saw the arrival of the two initial Yamal LNG cargoes in China’s terminals in 2018, thanks mainly to China’s support through a large capital injection and its know-how. The project completion has further consolidated Russia’s position as a key energy supplier to China, shifting its orientation from the West towards emerging and more promising markets in the East.
Political and economic motives have acted as a catalyst for greater Sino-Russian cooperation in recent years. In the aftermath of the Ukrainian crisis and the imposition of the heavy sanctions on Russia, together with the ongoing trade war between China and the U.S., both countries were forced to act and collaborate. Russia’s growing market share in the East will ensure the country has greater bargaining power in the long term. What European gas consumers should take into account is that if Eastern demand continues to grow at the current pace, the relatively cheap source of gas supplied to the EU gas market for many years will eventually be forced to compete with Asian buyers not only for LNG but also for pipeline gas.
- Opinions expressed in this piece are the author’s own and do not necessarily reflect Anadolu Agency's editorial policy.