Strengthening Russia-China Energy Ties Beyond Hydrocarbons: A Comprehensive Overview
Russia is actively seeking to broaden its energy collaboration with China, moving beyond the traditional supply of hydrocarbons. This strategic effort is aimed at creating a more integrated and multifaceted partnership in the energy sector.
Expanding the Scope of Cooperation
According to Igor Sechin, CEO of Rosneft, the next phase of Russia-China energy relations should focus on strengthening coordination across the entire value chain. This includes advanced technologies, machinery, modern shipbuilding, industrial equipment supplies, alternative energy, emissions reduction, and joint scientific research and experiments. This extensive cooperation could pave the way for a more resilient and diversified energy relationship between the two nations.
However, what could be even more crucial for Moscow is direct investment by China in Russia’s energy sector and related industries. At the Russia-China Energy Business Forum held in Moscow on July 23, Sechin openly called for increased Chinese investments. To sweeten the deal, he emphasized that the Russian energy sector offers high investment profitability and minimal capital return risk. Despite these assurances, Chinese investors have been cautious in replacing Western firms that exited Russia following the Ukraine conflict. The ongoing sanctions against Moscow further contribute to this hesitation.
The Role of Chinese Investments
Chinese companies have notably increased their purchases of Russian oil and gas, which has been vital for Moscow’s efforts to diversify its markets. Following the West’s refusal to buy Russian energy, China stepped up its imports. According to China Vice Premier Ding Xuexiang, China’s imports of Russian oil grew by 24% last year, reaching an average of 2.21 million barrels per day in the first half of 2024. This data was shared during a meeting of the intergovernmental commission on energy cooperation between the two countries, also held in Moscow.
Russia is prepared to increase its energy supplies using its western ports and the Northern Sea Route, in addition to regular exports from its Pacific outlets. However, shipments through the Arctic waters would require China’s assistance in constructing ice-class tankers. Sechin has called for collaboration with Chinese shipyards to meet this challenge.
Deepening Energy Exploration and Production
The intergovernmental commission on energy cooperation has decided to support collaboration between Chinese and Russian companies in the exploration and production of hydrocarbons, both onshore and on Russia’s continental shelf. This includes expanding cooperation in providing oil services and equipment and attracting specialized Chinese companies for operations like hydrofracturing.
Exploration and Production Initiatives
- Joint exploration and production of hydrocarbons
- Expansion of oil services and equipment cooperation
- Engagement of specialized Chinese companies for specific tasks
Renewables and Green Energy
The two sides have also agreed to support expert seminars on renewable energy and coordinate efforts to achieve international recognition of certificates for green and low-carbon energy. As part of their energy transition cooperation, Russia and China will share experiences in carbon market development and international carbon units trade.
Coal, Electricity, and Nuclear Power Cooperation
Cooperation in coal, electricity, and nuclear power remains a cornerstone of the Russia-China energy dialogue. Beijing supports Gazprom’s plans to supply helium and LPG to China, and both nations aim to promote LNG trade on a commercial basis. Yamal LNG, in which Chinese companies are shareholders, remains one of the strategic projects. Both countries have agreed to enhance communication on issues of mutual interest.
Challenges and Opportunities in Gas Supply
There has been no significant progress on the Power of Siberia 2 gas pipeline. Both sides suggested that Gazprom and China National Petroleum Corp. should intensify their negotiations over the contract. Nevertheless, Russian gas supplies via the existing Power of Siberia pipeline are growing. In June, these supplies generated a record monthly revenue for Gazprom, amounting to $737 million, a 30% increase year-on-year.
Revenue Insights
- Record monthly revenue of $737 million for Gazprom in June
- Comparison of revenue from exports to China and Europe
- Future revenue projections based on current trends
Gazprom’s revenue from exports to China has almost matched its revenue from pipeline gas supplies to Europe, which was Russia’s key gas market before the war. Although the volume of exports to China is expected to match European volumes at slightly above 30 billion cubic meters this year, the revenue will likely remain lower. This is because the oil-linked Power of Siberia prices are below Gazprom’s prices in Europe.
Pricing and Revenue Dynamics
Gazprom’s average export price to China might have averaged around $260 per thousand cubic meters, compared to approximately $340 per thousand cubic meters in Europe for the first half of this year, according to Energy Intelligence estimates. However, Gazprom’s Power of Siberia revenue is expected to surpass that of Europe next year when the pipeline completes its ramp-up to a 38 billion cubic meters per year plateau. Gazprom’s exports to Europe are likely to remain at the same level or fall, depending on the fate of the Ukrainian transit after the current contract between Moscow and Kyiv expires at the end of this year.
Future Revenue Projections
- Expected revenue surpass in the next year
- Potential decline in European exports
- Impact of Ukrainian transit contract expiry
Despite these developments, the revenue Gazprom gets from sales to China is just a fraction of what it used to earn in Europe before the war. Sales margins are even lower due to the lower price and higher upstream and transportation costs for Power of Siberia. This scenario is likely to continue for Gazprom’s new export contracts with China, as Beijing is now in a stronger position to negotiate favorable contract terms. The pricing for the 10 billion cubic meters per year “far eastern route” contract, signed just before the war, remains undisclosed. Gazprom aims to start supplies in 2027, but China is reportedly pushing for import prices close to Russian domestic tariffs under the long-negotiated 50 billion cubic meters per year Power of Siberia 2 supply contract.
FAQs
What is the current status of the Power of Siberia 2 gas pipeline negotiations?
Negotiations are ongoing, with both Gazprom and China National Petroleum Corp. advised to intensify their discussions over the contract.
How has China’s import of Russian oil changed in recent years?
China’s imports of Russian oil grew by 24% last year, reaching an average of 2.21 million barrels per day in the first half of 2024.
What are the key areas of Russia-China energy cooperation beyond hydrocarbons?
The key areas include advanced technologies, machinery, modern shipbuilding, industrial equipment supplies, alternative energy, emissions reduction, and joint scientific research and experiments.
How does the revenue from Gazprom’s exports to China compare to its exports to Europe?
While the volume of exports to China is expected to match European volumes, the revenue will likely remain lower due to lower prices and higher costs associated with Power of Siberia.
What are the future projections for Gazprom’s revenue from China?
Gazprom’s revenue from China is expected to surpass that of Europe next year when the Power of Siberia pipeline reaches its full capacity.
Conclusion
The evolving energy relationship between Russia and China is marked by a strategic effort to diversify and deepen cooperation beyond the traditional supply of hydrocarbons. While challenges such as cautious Chinese investment and lower revenue margins persist, the potential for expanded collaboration in advanced technologies, alternative energy, and joint scientific research offers promising avenues for both nations. As negotiations continue and new projects come online, the dynamics of this partnership will undoubtedly play a significant role in shaping the future of global energy markets.
