By Chen Weidong
Uncertainty with a gas deal may be overblown, but China would be wise to learn from the trouble Europe got into by depending on Russia for energy
A weibo post on the troubles arising again with a Sino-Russian natural gas deal has circulated online in the last few days. It reads: "On September 25, Russian Deputy Prime Minister Devorko Abramovich said in Moscow that there are still differences over the Russia-China natural gas contract. An agreement has still not been reached on Gazprom's demand that the Chinese side pay an advance sum. The Russia-to-China gas supply project is still uncertain."
On June 18, Gazprom's deputy chairman, Alexander Medvedev, said the sides had reached an agreement on an advance payment. China National Petroleum Corp. (CNPC) would pay Russia US$ 25 billion and Gazprom would start supplying gas to China within four to six years. The agreement was signed, but the payment particulars were not finalized. Abramovich's apparent remarks about "differences" refer to the Chinese side's belief that the payment is included in the pipeline construction deal. Russia insists that the money was not included, but rather was prepayment for gas.
A Baidu search did not yield any news reports on this issue. The Sino-Russian gas deal has received worldwide attention. I am going on the theory that if Abramovich made such a remark, the mainstream media would have picked up on it. If the comments only appear in one weibo post, it is possible they were fabricated. However, the fact it has spread so widely indicates problems exist.
The Russian government's main sources of income have been Gazprom, Rosneft Oil and Transneft. The present level of Rosneft and Gazprom's oil and gas output is mainly a legacy of the former Soviet Union. Sanctions from the United States and European Union that target investment in Russia's future oil and gas production capacity, such as Arctic, Eastern Siberian and liquefied natural gas projects, are seriously impacting the ability of Russia's large energy companies to raise funds. Their rapid expansion over the past few years has been accompanied by high debt. This is especially true of Rosneft Oil, which faces big liquidity problems. Gazprom's situation is better due to lack of acquisitions and mergers.
The Sino-Russian "deal of the century" is unlikely to proceed without difficulty. It is certain that Russia will eventually send gas to China. I have no doubt of that. The two countries' presidents witnessed the signing of the contract. The honeymoon is not over yet, but the story of alleged uncertainty is popular. Indeed, it has sent shockwaves though the industry and is raising many questions, namely: Are the Russians reputable?
Russia constantly says that it has and always will be a reliable energy supplier. But on January 5, 2009, Vladimir Putin made a startling announcement on television, saying that that during a bitterly cold winter, Russia would cut off the supply of gas to its Western European clients, who had been passive spectators of a dispute over gas between Russia and Ukraine. This was the first time that Russia (or the former Soviet Union) had reduced the gas supply to its Western clients. In the eyes of many Western scholars and politicians, Putin's move was an attempt to crush the EU. Thus, Europeans have come to view Putin's use of energy resources as a tool for punishing his neighbors.
Also, on New Year's Day 2006, Russia shut the gas pipeline to Ukraine over outstanding debts. Several months later, Lithuania's oil supply was cut off because a refinery had been sold to a Polish company instead of Rosneft. That same year, a petroleum pipeline to Georgia mysteriously exploded, and Russia refused to allow Georgian investigators to investigate or aid in repairs. In 2007, Russia and Estonia got into a dispute over the dismantling of a Soviet Union-era war monument, and Estonia's oil supply was immediately cut off.
Following the collapse of the Soviet Union, right up to Putin's latest term in office, Russia made great efforts to integrate with Europe, and Westerners were accepting. But that has all changed.
The recent crisis in Ukraine contributed to China signing this gas deal with Russia. The tension was not the main reason for the deal, but it served as a lubricant. In the period leading up to the outbreak of the crisis, the EU and Russia were fiercely competing for sway over Ukraine's economic orientation. When the problems erupted, their severity exceeded the expectations of most observers. We all know how the crisis came to be, but not what the final outcome will be.
Perhaps the problems in Ukraine will increase energy cooperation between China and Russia. The great triangular relationship between China, Russia and the United States may become even more unbalanced. In the United States, some scholars think that in the next few years Russia will be busy with U.S. antagonism and become even more estranged from Europe. Thus, Moscow will be more dependent on Beijing, even becoming the more submissive partner. I do not completely agree with this. Russia will never depend on anyone, least of all China.
In Putin's diplomatic priorities, China never comes before the United States and Europe. We must not give in to wishful thinking. It is an unspoken understanding that the Russians fancy themselves superior to "Easterners." Even though there is no proof that Abramovich said "the Russia-to-China gas supply project is still uncertain," this should still sound alarm bells for us. We must beware of the risks and be prepared. Europe is in a predicament today because it relied too heavily on Russian gas. We would be wise to learn from its mistakes.
Chen Weidong is China National Offshore Oil Corp.'s chief energy researcher
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