Russia's energy trade with China to quadruple by 2025
The value of Russia's energy trade with China could quadruple by 2025, according to a new study
The report from consultancy Wood Mackenzie, Russia's pivot east: the growth in energy trade with China, said Russo-Sino energy deals could top 100 million tonnes of oil equivalent (toe) by 2025.
Russia's focus on developing its East Siberian reserves, falling European gas demand and China's soaring energy consumption over the past decade will drive greater Russo-Sino energy cooperation, Wood Mackenzie said.
As oil output in its West Siberian fields declines Russia is focussing on developing resources in sparsely populated East Siberia, where the production will be closer to energy-hungry Asian markets.
Wood Mackenzie said it expects China's total oil imports will overtake the US by 2017 and rise to 9.2m barrels per day (b/d) by 2020. This is up from 2.5m b/d in 2005.
Since 2009 China's state-run oil firms have increased their stakes in foreign energy resources to secure new supplies.
Historically, Russia has been wary of Chinese ambitions in the east, fearing the country would try to extend its economic and political influence in the region. However, China has nonetheless begun financing major infrastructure projects in East Siberia, opening up the region to Asian export markets.
The construction and expansion of the Eastern Siberia Pacific Ocean (Espo) pipeline has been a critical piece of infrastructure in forging a closer relationship between Russia and China, Wood Mackenzie said. The pipeline was designed to transport oil from East Siberia via Kozmino Bay to the Pacific coast.
In 2009 China agreed to provide $25 billion to extend the pipeline to Asia in return for guaranteed crude supplies. Around 1.3m b/d were delivered to China through Espo last year, Wood Mackenzie said.
Ian Thom, Head of Wood Mackenzie's Russia Upstream Research, said the pipeline has opened up East Siberia for large-scale commercial oil production, resulting in a significant increase in upstream investment. Thom said oil production from East Siberia is expected to reach more than 1.2m b/d by 2017.
Russia's efforts to export natural gas to China have progressed more slowly, however.
Russia signed a preliminary gas-supply deal with China in March. The framework agreement called for Gazprom to supply 38bn cubic metres per year (cm/y) of gas for 30 years starting from 2018. This would eventually rise to as much as 60bn cm/y. However the terms of the deal have yet to be finalised, with the exact route and price for the gas still undecided.
China's soaring gas demand shows no signs of abating. Last year the country consumed 148bn cm of natural gas, according to Cedigaz figures. This year China's gas demand will reach over 170bn cm, Wood Mackenzie said.
However one recent gas-supply deal has been a major step forward in Russo-Sino cooperation on energy issues.China National Petroleum Corporation (CNPC) bought a 20% stake in the Yamal liquefied natural gas (LNG) project from Novatek, a Russian upstream player, in June. The 5.5m tonnes per year (t/y) three-train project will source gas from the onshore South Tambey gasfield, which also holds condensates. First gas is expected in 2016.
There are also plans to build a liquefaction plant near Sabetta, northeast of the Yamal Peninsula, which would produce 16.5m t/y of LNG. CNPC will buy at least 3m t/y of LNG as part of the deal.
Historically, Russia's energy trade with China has been limited by the Kremlin's focus on developing its large West Siberian resources for export to European markets. European gas demand, however, has fallen steeply since the financial crisis gripped the continent in 2008, prompting a shift back to cheaper imported coal for power generation.
The International Energy Agency does not expect gas demand in the European Union to rise back above 2010 levels until 2020.
Soaring US shale gas production hasn't helped Russia either as Qatari LNG cargoes, originally destined for the US, have been diverted to Europe.
Russia's state-run Gazprom has also lost some of its market share to Norway's Statoil because of its reluctance to break away from oil-indexed pricing for natural gas. Those shifting fundamentals have brought more urgency to Russia's pivot to the east.
Wood Mackenzie suggested that negotiating the future terms of cooperation between Russian and Chinese companies will, however, be fraught with difficulties. Russia may have to allow deeper Chinese involvement in its energy sector, the consultancy said.
However the proximity of Russia's East Siberian resources to Asia and China's soaring need for energy will ensure further Asian investment. The consultancy expects further Chinese investment in Russian LNG, gas pipelines and processing, and in power generation and transmission capacity.
China's increased energy trade with Russia could also make the European energy supplier the world's largest electricity exporter by 2030, Wood Mackenzie said, as China's power demand surges.
The Russian and Chinese governments are planning for power exports to reach 38 terra watt hours (Twh) by 2020, Wood Mackenzie aid. This will come from new coal-fired facilities and hydropower in Russia's East, where output is expected to ramp up to 70 Twh by 2030.