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Russia: Competition Intensifies Ahead of an East Asian Energy Strategy

6 MINS READJun 25, 2013 | 10:01 GMT
Russia: Competition Intensifies Ahead of a East Asian Energy Strategy
(DMITRY LOVETSKY/AFP/Getty Images)
Russian President Vladimir Putin (C) speaks to Chinese Executive Vice Premier Zhang Gaoli (L) at the St. Petersburg Economic Forum.
Summary

As Moscow seeks new buyers in East Asia for its oil and natural gas exports, the competition over who profits from new energy agreements is intensifying. In fact, several agreements reached over the past weekend exemplify this competition. On June 22, Russian natural gas giant Gazprom signed documents with a consortium of Japanese firms to build a liquefied natural gas facility in Vladivostok. Earlier on June 21, Tokyo agreed to allow Russia's Rosneft to supply Japan with liquefied natural gas. Meanwhile, Russia's Novatek signed a deal to include China National Petroleum Corp. in the Yamal liquefied natural gas consortium. The deal follows a massive $270 billion oil agreement made June 21 between China and Rosneft.

While these deals reaffirm Russia's desire to divert some of its energy exports from Europe, what is more interesting is the way in which they are being struck. Japan and China are playing Russian energy companies off one another, and Russian energy companies are playing Japan and China off one another — all while each party looks to capitalize on Russia's new energy strategy.

The largest of these deals came on the sidelines of the St. Petersburg Economic Forum. The deal stipulates that Russia will supply China with 600,000 barrels of oil per day by 2025 — a 300,000-barrel-per-day increase. The deal has been in the works since 2009, when China lent Rosneft and pipeline operator Transneft $25 billion. Slated to be repaid in oil supplies, the loan helped Rosneft and Transneft expand the Eastern Siberia-Pacific Ocean pipeline, which was completed in stages through 2012. The June 21 deal also stipulates that China will lend Rosneft an additional $30 billion.

Along with the Eastern Siberia-Pacific Ocean pipeline, the Sakhalin oil export terminal and various other pipelines, railways and shipping routes, Russia now has the capability to send some 2.1 million barrels of oil per day to the Pacific Ocean. China clearly wants to acquire some of this oil. In fact, Beijing is expected to expand on the 600,000 barrels of oil per day secured by the June 21 agreement.

Russia: Competition Intensifies Ahead of a East Asian Energy Strategy

Russian Oil Export Capacity to Asia

Ultimately, the deal dovetails into Russia's overall plan to diversify its oil export markets, which rely mostly on demand in Europe. For Moscow, maintaining reliable export markets in East Asia ensures revenue even if European demand suddenly drops.

Russia already has increased its oil exports to East Asia: Whereas the region accounted for only 4 percent of total oil exports in 2005, it accounted for 17 percent in 2012. Rosneft has considered having the region account for as much as 30 percent of exports by 2015.

Russia's new energy orientation pre-empts a possible drop in European demand, but this drop has yet to happen. As of 2012, 78 percent of Russian oil exports went to Europe, and Rosneft signed several deals with European firms for continued oil supply. For example, Rosneft signed a $7 billion deal with Poland's PKN Orlen, whereby Russia would supply Poland with 155,000 barrels of oil per day from 2013 to 2016. This is the second deal signed between the two in 2013 (the first was worth $15 billion). Rosneft also signed a deal to gain a 20.99 percent stake in Italian oil trader Saras, which also holds 15 percent of Italy’s refining capacity.

Complicated Relationships

The China-Rosneft oil deal was the weekend's largest, but it was not the only significant energy agreement. Beijing and Tokyo signed natural gas deals with Moscow, and these deals are greatly complicating relationships among all these parties.

Russia's natural gas strategy is similar to its oil strategy: Moscow wants to be able to export to East Asia if demand in Europe declines. Later in 2013, Gazprom will break ground on the New Pacific Gas Pipeline, which will connect the natural gas fields in Chayndan and Kovykta to the Pacific Ocean. Developing the fields will cost $13.7 billion, and the pipeline will cost $24.4 billion, according to Gazprom CEO Alexei Miller. The pipeline is expected to have a capacity of 50 billion cubic meters by 2017.

Gazprom is trying to decide where this natural gas should go once it reaches Vladivostok. The company will either build pipelines to China or Japan or a liquefied natural gas facility at Vladivostock to service all its Pacific customers. With so many options, Russia has been courting East Asian countries, primarily China and Japan, to be its new customers.

Russia: Competition Intensifies Ahead of a East Asian Energy Strategy

Russia energy into East Asia

After more than a decade of deadlock, Russia and China resumed talks this year over a natural gas deal whereby China would receive natural gas via the New Pacific Gas Pipeline and would possibly receive liquefied natural gas contracts.

Several issues have impeded the deal, including routes, supply amounts and pricing. In the latest draft, Russia would supply 38 billion to 50 billion cubic meters to China beginning in 2018 at an oil-indexed price of $300 per thousand cubic meters. Russia compromised on the price, lowering it to $300 from the $375 it had initially proposed after China turned to Turkmenistan for natural gas instead. Now China, is asking for the price not to be indexed on oil — something on which Russia has not yet budged. Russia and China have been close to striking deals on many occasions, though currently both are putting pressure on the other to finally come to a compromise before the end of the year. 

Now each side is raising the stakes. Over the past weekend, Gazprom put pressure on China by signing a deal with a consortium of Japanese firms — Itochu, Japan Petroleum Exploration, Marubeni, INPEX and Itochu Oil Exploration — to build a natural gas facility at Vladivostok. The deal could mean that Japan gets first bid on natural gas shipments from the facility.

Indeed, Japan started to commit to Russian energy for the first time (excluding Sakhalin) after the meltdown at the Fukushima nuclear power plant, which compelled Japan to take its nuclear power generation offline. Even though Japan plans to bring its nuclear power back online, the process will be gradual because of regulatory and political complications, and Tokyo wants to have ample and diverse sources of energy supply to ease the strategic vulnerability inherent in its energy dependency. Russia can offer a much lower price on natural gas than Japan currently pays — $700 per thousand cubic meters.

But China wants to try to minimize Russian influence in East Asia, so Beijing will oppose any potential warming of ties between Tokyo and Moscow.

To keep its leverage in negotiations with Gazprom, China National Petroleum Corp. struck a deal over the weekend to be included in the consortium for the Yamal liquefied natural gas facility, which includes France's Total and Russia's Novatek. (Gazprom holds shares in Novatek, but it is not influential enough to prevent Novatek from becoming a future rival.)

The Yamal facility probably will be completed before Gazprom can complete any of its liquefied natural gas facilities or the New Pacific Gas Pipeline. However, per the request of the Kremlin, the Yamal facility will spit shipments between Europe and Asia. China National Petroleum Corp. thus cannot acquire contracts for the majority of liquefied natural gas supplies from Yamal.

Complicating the matter further is the fact that Japan is also trying to affect the outcome of Russia's new energy orientation. On June 21, Tokyo struck a deal with Rosneft for the supply of liquefied natural gas, which would begin in 2019. Even though Rosneft currently does not have concrete plans to build a liquefied natural gas facility, it is considering building such a facility at Sakhalin I or Vladivostok. Japan is using cash now to lock in large volumes of liquefied natural gas for the future with different firms.

Japan and China are pitting the Russian firms against one another even as Russian firms are pitting Japan and China against each other. It is a complicated issue, but all parties may believe that Russia's new energy strategy will be lucrative enough to make the effort worthwhile. 

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