The agreement signed with Russia after the latest round of Sino-Russian energy cooperation talks just concluded in Moscow papers over some wide cracks. For one, there doesn’t seem to be much more to the agreement than that the two countries will continue to try to conclude their long running discussions over two long-term gas-supply deals. Xinhua’s report is all cheer and no content.
What the two sides have been talking about, seemingly since when the Siberian forests that became the oil and gas were still forests, is to expand an outline agreement under which from 2015 Russia’s gas monopoly Gazprom would supply 30 billion cubic meters a year–roughly one-third of China’s 2009 consumption and a quarter of Russia’s total exports–to more than double the volume, supplied via two direct pipelines from Siberia to western and central China. The formula for determining the price has been the main sticking point.
Been there, done that, got nowhere. Pricing is at the heart of the dispute over the Russian oil China has recently started getting via the Daqing spur to Russia’s East Siberia Pacific Ocean pipeline (ESPO). The deliveries are the result of $25 billion-worth of loans in 2009 from China National Petroleum Company (CNPC) and the China Development Bank to the energy company Rosneft and the state-owned pipeline monopoly Transneft that was to be repaid in oil, expected to be 15m tonnes a year (150,000 b/d) for 20 years starting this year.
The oil started flowing at the start of the year, but since then China has accused Russia of overcharging it for the deliveries, and demanded more oil as a make-up, while Russia said China was way underpaying given market conditions. The pricing formula has broken China’s way and Russia can sell to Japanese, South Korean and American customers far more profitably. It certainly has no intent to double up on its losses supplying China. Transneft has threatened to sue CNPC in court. Hard ball meets hard ball.
Meanwhile, the deliveries continue at their original levels. Last month CNPC and Rosneft broke ground for a joint-venture oil refinery in Tianjin that will be able to refine 260,000 barrels a day and is due to start operations in late 2013.
On the gas front, China’s increasing ability to source domestically and from Central Asia and some doubts about Gazprom’s capacity to deliver the extra gas has strengthened Beijing’s negotiating hand, while the higher prices Russia can get for its gas in Europe make Moscow in no hurry to resolve the issue, let alone buckle. Vice Premier Wang Qishan said after the Moscow that China “hopes the two sides could make further essential progress in gas talks as soon as possible and that the two sides exchanged views and plans on future energy cooperation, demonstrating mutual trust as well as candid and pragmatic spirit of cooperation between China and Russia”. Which pretty much says there was no progress.