China finally switching to Russian gas

As the giant Power of Siberia pipeline intended to transport natural gas from Yakutia and the Irkutsk areas of Russia to China approaches completion, with Gazprom saying that it is now two-thirds complete, the semi-official Chinese newspaper Global Times has published an article complaining about irregularities in the supply of gas from China’s traditional Central Asian gas suppliers, Turkmenistan and Uzbekistan.

The sharp drop of liquefied natural gas (LNG) shipments through a key Central Asian pipeline network has put the already-tight domestic LNG supply situation to the test.

There are two reasons for the plunging shipments: first, LNG demand increased in the supplier countries themselves; second, the suppliers were withholding LNG in hopes of getting better prices in other markets. Those factors prompted the suppliers to break the terms of their contracts with China.

According to a statement by China National Petroleum Corp (CNPC) issued on January 31, the nation’s LNG supply situation has been deteriorating. The volume of LNG received through central Asian pipeline networks has fallen by nearly half, domestic news portal jiemian.com reported. The sudden cuts by two Central Asian countries, Turkmenistan and Uzbekistan, added a new risk to the Chinese energy supply network. China needs to re-evaluate the security of its energy supply network in Central Asia.

According to insiders at China’s three major State-owned oil companies, the Central Asian countries failed to provide China with the contracted volumes of LNG with the excuse that they didn’t have enough money to repair broken LNG equipment. A notice issued by CNPC stated that Central Asian countries owe China an average LNG volume of 30 million cubic meters per day, according to jiemian.com

Sources also said that China National United Oil Corp is negotiating with these LNG suppliers. But it seems that Chinese oil companies have no bargaining chip if the suppliers don’t keep their end of the deal. Instead of China, the suppliers can potentially send LNG to Europe at a higher price.

The cut in LNG supplies has added a new risk factor to China’s energy security, with domestic LNG inventories at record lows. Data from the Beijing oil & gas transportation center showed that the domestic natural gas pipeline network had “emergency” storage of 1.99 billion cubic meters at the end of January. According to jiemian.com, as of January 30, the volume available for sale in the current pipeline network was 420 million cubic meters per day whereas demand was 445 million cubic meters per day, in addition to the network’s own use of 5 million cubic meters per day. So the domestic supply gas is about 30 million cubic meters per day.

As a result, CNPC must ration the supply and sale of LNG to avoid a total collapse of the LNG pipeline system.

The China-Central Asia LNG pipeline, which starts at the border between Turkmenistan and Uzbekistan on the banks of the Amu Darya River, is one of the world’s longest LNG pipeline. The gas pipeline runs about 10,000 kilometers, with 188 kilometers in Turkmenistan, 530 kilometers in Uzbekistan, 1,300 kilometers in Kazakhstan and 8,000 kilometers in China.

Turkmenistan is the largest pipeline LNG exporter to China. But since January, the gas concern there has shut down supply three times.

If all these figures are true, the risk is obvious: Central Asia has emerged as a broken link in the international energy security network that China has made such effort to forge.

With China participating in globalization as the “world’s factory,” ensuring energy security is vital for China. China has put huge resources (in banking, diplomacy, investment, markets and public finance) and effort into building a five-channel international energy supply network to satisfy the world’s largest oil and gas demand.

As China adjusts its energy consumption structure, switching to green energy, the demand for LNG will constantly grow and create a heavy dependency on foreign resources. The high dependency on LNG from Turkmenistan has become a potential security risk.

If this situation continues, it will not only lead to unexpected problems for State-owned petroleum corporations, it will also leave the Chinese government unprepared. If the key passage of LNG is not stable, the security of China’s international energy supply network must be re-evaluated.

Russia and the Power of Siberia pipeline are conspicuously never mentioned in this article.  Nonetheless Chinese anger and concern about the breaches of contract by their traditional Central Asian gas suppliers is clear enough, as is the urgently expressed need for China to diversify away from them to a more reliable supplier, which can only be Russia.

The article in fact highlights the key role of natural gas in China’s future energy mix.

A visit to Shanghai in August impressed on me the extent to which the disastrous state of air pollution has become a major political and social in China, with China having a pressing need to move towards a ‘greener’ energy mix and to move away from its present over-reliance on coal.

As the article in Global Times shows, natural gas plays a critical role in all this, even as China forges ahead with alternative energy technologies, and a stable and reliable supply of gas to the Chinese energy market is regarded by China as essential for its energy security.

It turns out that the Chinese are finding that the Central Asian states upon which they have up to now relied for their gas are unable to maintain their gas pipeline infrastructure – much of which was built by the USSR – and are not above abusing their monopoly positions in China’s gas market to extort from China a higher price for their gas, even if this involves breaking their contracts with China.

This contrasts with Gazprom, which has a well-earned reputation for being an exceptionally reliable supplier, invariably honouring its gas supply contracts, and having all the technical and logistical resources needed to maintain its gas pipeline and gas transportation infrastructure and network in good working order.

The logic of substituting Gazprom and Russia for the Central Asian states as China’s main source of natural gas is obvious, and the Global Times article both highlights it and hints at it.

The Global Times article highlights a key point about Russian-Chinese economy cooperation.

Though trade between the countries does not approach the volumes of trade between China and the US or the EU, it is rising rapidly, with the two countries having resources which compliment each other.

Moreover Russia looks to be becoming an increasingly important source for China’s energy and raw material imports, as China discovers the difficulty of importing them reliably from elsewhere, and must also worry about US threats to blockade China’s main sea route, the South China Sea.

Russia has already replaced Saudi Arabia as China’s main source of oil.  It looks increasingly positioned to replace the Central Asian states as China’s main source of natural gas as well.

The economic linkages between the two countries are growing bigger and stronger, with their importance to each country starting to transcend their physical volume, as each comes to rely more on the other for the critical imports each needs.