According to the Financial Times, negotiations between China and Russia on a large gas pipeline have stalled. The reason is that Russia considers China to make "unreasonable" demands on prices and supply levels.
After the outbreak of the Russia-Ukraine conflict in 2022, Russia accelerated negotiations on the "Power of Siberia-2" gas pipeline. The gas pipeline will transit through Mongolia and then to China, thus involving negotiations with third countries.
The pipeline will carry 50 billion cubic meters of energy per year, which is the same level as Russia has delivered to Europe in the past year, and the price issue complicates the negotiations. Whether or not we can talk about it will affect the cooperation between the two countries to a certain extent.
1 Gas pipelines with multiple interests
Negotiations on the pipeline are complex, and they are seen as a barometer of cooperation between China and Russia. This argument is that if the negotiations are successful, it means that the cooperation between China and Russia will be further improved, and Russia will be more deeply tied to the Chinese economy.
Of course, this also means that Europe's hope of getting a lot of cheap Russian gas again after the end of the conflict in Ukraine is even more slim. In particular, after the Baltic gas pipeline was blown up in September 2022, it buried the hope that Europe would continue to import natural gas from Russia in the short term.
However, the impact of the bombing of the Baltic gas pipeline is only temporary, and once the conflict in Ukraine ends, it is possible that Europe and Russia will restart negotiations at some point in the future.
Therefore, the negotiations on the Power of Siberia-2 gas pipeline have attracted the attention of major powers, involving China, Russia and Mongolia, and affecting Europe.
As for the United States, it is also unhappy to see an agreement on the Sino-Russian natural gas pipeline, which has strengthened Russia's energy industry and made the Russian economy more secure, which has weakened the United States' plan to suffocate the Russian economy and weaken Russia's national strength.
Second, this will diversify China's energy supply sources, and it will be more difficult for the United States to blockade China's energy imports through naval power in wartime.
2 Difficulties in negotiating with Russia
There is no doubt that both China and Russia want to reach an agreement, and it will be beneficial to both countries. But price and supply are an issue. Russia wants to sell at a good price, and it wants to make sure that the amount of supplies to China every year, that is, the amount that China buys from Russia, is guaranteed.
In this regard, it is understandable that China is the largest international buyer of energy, and Europe stopped purchasing gas from Russia after the conflict in Ukraine. What's more, Power of Siberia 2 was tailor-made specifically for China.
But from another point of view, it is now a buyer's market, and China, as a buyer, is asking for more favorable prices, which is not an exaggeration. Think about it, Russia has always been peddling gas on the international market before this, between China, Japan and Europe, to get a good price from it, and even to see who is willing to invest more money in the laying of pipelines, after all, it costs a lot of money to lay pipelines.
For example, in May 2014, China and Russia signed a 30-year, $400 billion contract for the transmission of natural gas. This contract is also known as the Power of Siberia 1 pipeline.
At that time, this was a major international energy order, which made Japan envious and made some natural gas-producing countries jealous. However, many people don't know that this Sino-Russian natural gas deal took ten years to negotiate. If you count the previous operation, it is more than ten years.
In fact, in the late 1990s, China began to negotiate this gas contract with Russia. However, the negotiations between China and Russia have been challenged by Japan, which has stepped in to compete for a gas pipeline in Siberia. Therefore, at that time there was a dispute over the so-called pipeline to China, as well as the pipeline to Japan.
At that time, Russia was not polite to China at all, swinging between China and Japan to see who gave good conditions and reaped the benefits of the fisherman. So much so that in 2014, when Russia annexed Crimea and suffered sanctions from the United States and Europe, Putin immediately flew to Beijing under pressure and signed a $400 billion natural gas deal with China.
Otherwise, China does not know how long it will have to wait before it can sign a contract.
So, to be honest, although Russia finds it difficult to negotiate with China, it is also more difficult for China to negotiate with Russia. China waited a decade for the $400 billion gas deal in 2014, and this time it just wants a better contract, and it's not an exaggeration.
Since 2000, China's economic growth has remained relatively high, and because China's economy is getting bigger and bigger, the demand for energy and metals and minerals is also getting higher and higher.
One of the most obvious examples of this is Australia, which raised the price of high-speed rail ore annually from the early 2000s to 2008.
Therefore, in business, it is understandable for China to consider its own demand for natural gas, and to think about the price and volume of purchases. These are all commercial activities, and there is no so-called taking advantage of the danger of others to take advantage of the conflict between Russia and Ukraine to bargain aggressively.
On the other hand, Putin could have negotiated a contract with China for the Power of Siberia-2 pipeline before the launch of the special military operation in February 2022. Let's not forget that Power of Siberia-2 was launched in January 2021, when Russia had already established the Eastern Union gas pipeline company in Mongolia.
If it weren't for the fact that Russia was still trying to sell at a good price, and because Russia did not expect that Europe would stop purchasing natural gas from Russia after the outbreak of the conflict in Ukraine, it would have been possible for Power of Siberia 2 to negotiate before the outbreak of the conflict in Ukraine, although the time is still a little tighter.
3 There is no need to be tied to Russia
Of course, as far as China is concerned, it does not want to be completely tied to Russia, and there are many countries that want to sell oil and gas to China, and China needs to assess that if it completely eats the power of Siberia 2 gas, it will inevitably reduce its purchases from other countries.
China is not only a friend of Russia, but also friends of other oil and gas exporting countries. To be fair, these friends need to be taken care of at the right time. If China can help Russia, it will definitely help, but it cannot "wrong" itself in terms of price and delivery volume.
China and Russia are indeed working closely together, and this is the general strategic direction that will not change.
But this does not mean that China needs to "look at the big picture" at the expense of its commercial interests. Basically, the two countries need to cooperate on a mutually beneficial basis. China's bargaining will also be within reasonable limits.
Two years ago, there was also an argument that Russia intends to integrate Power of Siberia 2 into Russia's internal gas network, so that the gas in the network can be pooled and sold to China or Europe.
The advantage of this is that Russia can be targeted at sales in China and Europe. To see who has the highest price, it is very beneficial for Russia to allocate more gas to whomever it wants.
When Russia insists on doing business, China can of course do the same, this is fair, it is not an unreasonable demand, and no one takes advantage of anyone, it depends on the supply and demand conditions of the international market, as well as their respective needs.
Therefore, China and Russia need to sit down and negotiate and find an agreement that is acceptable to both sides.
In addition, the previous plan was that the Siberian 2 pipeline would pass through Mongolian territory, so one of the two countries would have to pay a "toll" to Mongolia. The amount of this toll is said to be about $1 billion.
The payment of tolls is not unprecedented. Previously, Russian gas to southern Europe passed through Ukraine, which Russia paid an annual toll.
It's just that Ukraine has asked for price increases several times and increased tolls for natural gas transmission, which makes Russia unbearable.
In view of the fact that Mongolia has also reneged on China's contract several times, especially when it cannot withstand the instigation of the United States and Japan, it will tear up the contract. China has had to consider the risks of the Siberian 2 pipeline passing through Mongolia.
The previous plan was that the Power of Siberia 2 pipeline was expected to be 3,550 kilometers long, which is longer than the 3,000 kilometers of the China-Russia eastern gas pipeline. 950 kilometers of this pass through the territory of Mongolia.
This is a big investment due to the long pipeline. It is estimated that China and Russia will share the cost of building the pipeline, and the Russian section of the pipeline will be funded by Russia or borrowed from Chinese banks, and the pipeline in China will be built at China's expense.
The question is, who financed the construction of the 950-kilometer Mongolian section? If China pays for it, China certainly has the right to say how it should be built and where it should be built.
4 China's voice has increased
Besides, China will have more and more say in energy procurement, now and in the future. Why?
There are two possible causes, and one definite cause.
First, the world economy is already slowing down, and economic activity in the advanced economies of the United States and Europe is declining, especially when the economies of the United States and Europe enter a recession, and the global demand for oil and gas will decline.
Second, some oil-producing or natural gas exporting countries need to export more oil or natural gas to increase their revenues in order to meet the needs of their own economies. Russia is the best example of this.
Therefore, it may be difficult for Russia to repeat the situation of Russia in the first 10 years of the 21st century.
Third, China has achieved good results in the construction of new energy, such as wind power, hydropower, solar energy (photovoltaic), and new energy vehicles, all of which are the first in the world.
In the past two years, China has made great progress in pure electric vehicles, and it is certain that China's dependence on oil and gas will gradually decrease in the future.
Although China's dependence on oil and gas will be reduced in the future, China will still be a major energy consumer, so China's voice in global energy prices will not decrease, but will increase.
It is difficult for global energy demand to grow, and China is the world's largest energy importer, so of course the voice will increase, and the pricing power will also increase.
Therefore, there is no need for China to be "aggrieved" on energy price contracts, especially for large orders with long horizons.
Now is the time for China to show its "strength".
5 Huge opportunities for cooperation between China and Russia
It must be noted that the cooperation between China and Russia is not only in the areas of energy and resources and minerals. In the past, Russia has always complained that China is only interested in Russian oil, gas and minerals, and that Russia wants China to invest more broadly in Russia.
Russia is absolutely right in this regard. For example, if Russia can be more open to China in terms of industrial investment, rather than guarding against China, there will be more opportunities for cooperation between China and Russia.
Moreover, the amount of investment in this area will only be greater, for example, in the development of the Far East. If Russia is willing to open up more investment and industrial cooperation in the Far East to China, China and Russia will have a great deal to do in the region.
The recent cooperation between Russia and China at the mouth of the Tumen River is a good start.
The two sides will gradually develop from the mouth of the Tumen River to the north and west, so that China's investment will be guaranteed.
The investment is a two-way street, not one-sided, and must be an area of interest to both parties. If Russia is still wary of China, it will be difficult for Chinese companies to open up their interest in Russian investment.
In the past, the investment of Chinese enterprises and manufacturers in Russia has not been cheated, and that is a lesson. Russia needs to open up investment in areas of interest to Chinese businessmen, and it is a large, large-scale open investment, not just a little at a time.
In addition, Russia needs to safeguard Chinese investments. Only in this way can the economic and trade cooperation between the two countries be long-term and truly mutually beneficial.
That's all for today's analysis and reasoning, we'll see you next time!