National gas deal with Russia heralds closer ties with oil, coal and electricity

China signed a long-awaited 30-year deal last month to buy Russian natural gas worth about $400 billion, according to news reports. There has been a lot of debate about the agreed price, possibly because the pricing issue was the main reason for the long negotiations. But the importance of the deal goes beyond the content of the deal itself. It provides an important turning point in Sino-Russian energy cooperation.

The deal addresses some of the urgent needs of both countries. Because of the air pollution cleanup, China is keen to have Russian gas as soon as possible.

In the long term, the deal will promote comprehensive cooperation in the energy sectors of both countries, including oil, coal and electricity.

China and Russia are strongly complementary in energy resources and markets.

Russia has abundant energy resources. It is the largest exporter of natural gas and the second-largest exporter of petroleum and petroleum products. Energy accounts for about 70 percent of the country's total exports. Shrinking sales in traditional European markets due to the slow growth of demand in the region has motivated Russia to find alternative markets for its energy products. Also, the North American shale gas boom and possible lifting of the ban on US oil and gas exports increase this concern.

On the other hand, it is clear that growing Asian markets, especially China and India, are emerging markets for Russia's energy exports. China has the largest growth potential in the energy market and, to some extent, a strong Chinese energy market for Russia would mean not only great sales potential, but would also be a source of stable economic growth. This is especially so because Russia's share of the European natural gas market is expected to shrink.

Sino-Russian energy cooperation helps meet China's growing energy demand and ensures China's energy security. Economic development in China still largely depends on the availability of energy. This is why China's energy security is closely related to the sustainable development of the economy.

In the short to medium term, China also needs Russian gas to support the air pollution cleanup. China has achieved impressive economic growth over the past three decades. However, serious urban air pollution has attracted wide public concern. The State Council initiated an action plan in 2013. It outlined efforts to improve air quality and drastically reduce air pollution, especially in areas near Beijing, the Yangtze River Delta and the Pearl River Delta, in the next five years.

Many factors contribute to air pollution in China. However, controlling energy consumption, changing the energy structure and increasing the supply of clean energy should be the main priorities of the cleanup. This is well understood: The plan is focused on reducing coal consumption in eastern China, and the government started by banning the building of new coal-fired power plants in these regions.

These areas are still growing, and account for a significant portion of energy demand increment in China. Coal provides 66 percent of primary energy and about 75 percent of electricity in China. The potential of hydropower is limited, and other clean-energy sources such as wind and solar are too small to make meaningful contributions. Nuclear energy could substantially replace coal but its development requires a lot of time. So natural gas, with relatively fewer emissions, could possibly substitute more than 5 percent of coal in the primary energy mix in the next few years, given the Russian gas deal, of course.

In the long term and from a macro perspective, the Sino-Russian gas deal is important in ensuring China's energy security. China's energy import security has at least two fundamental requirements. The first is the stability of energy-producing countries, and the second is safety of energy transportation. Russia seems to satisfy both - it is stable and also shares a long border with China.

China's dependence on foreign oil and gas is increasing rapidly. In 2013, it imported nearly 300 million tons of crude oil, indicating a foreign oil dependence of more than 58 percent. The International Energy Agency forcasts that China's dependence on foreign oil may exceed 80 percent by 2035. Current foreign dependence on natural gas is about 35 percent and also increasing rapidly.

For China to have energy security, the main thing is to reduce risk by diversifying import. The Middle East is China's major oil import source, accounting for about 46 percent, but the region is unstable. China's heavy dependence on transport through the Strait of Malacca, the narrow passage connecting the Indian Ocean and South China Sea, when importing crude oil is considered a significant security risk. About 80 percent of the country's imported oil comes through it. Sino-Russian energy cooperation could reduce import risks and is deemed important for China's energy security.

The natural gas contract between China and Russia is an important step toward diversifying China's gas imports. It can be considered a major accomplishment of China's strategic arrangement of "four-corner" gas passages. With the signing of the deal, the northwestern, northeastern, southwestern and ocean strategy passages have taken shape. The northwestern one is the Central Asia-China gas pipeline, the southwestern one is the China-Myanmar gas pipeline, the northeastern one consists of are the China-Russia pipelines and the eastern maritime passage is comprised of liquefied natural gas imports. The combined passages will ensure multiple sources of natural gas and increase the share of natural gas in the energy structure in a relatively short time. The formation of energy passages contributes to ensuring China's energy security, which helps diversify import channels, sources and types of energy.

With the closing of the deal, another planned Russia-to-China natural gas pipeline with a capacity of 30 billion cubic meters a year is expected soon. Natural gas will be the main aspect of China-Russia energy cooperation in the coming years. However, the partnership between the two countries will be expanded to other energy sources, including oil, electricity, coal and even energy equipment.

Energy deals between China and Russia are not without challenges. In addition to the expected pricing issue, effective cooperation arrangements between the enterprises of the two countries are yet to be established. But that can be handled through increased understanding and collabration. Finally, with the changing international energy supply landscape, both China and Russia need strong partnerships to respond to the changes.

The author is director of the China Center for Energy Economics Research at Xiamen University. The views do not necessarily reflect those of China Daily.

(China Daily European Weekly 06/06/2014 page11)