The Future of China-Russia Relations

Sino-Russian Energy Relations: An Uncertain Courtship

Introduction The China-Russia energy relationship has not reached the level of development their geographical proximity and economic complementariness implies. In terms of forging an energy partnership, China and Russia appear to be a perfect match. China, the world’s second largest oil consumer and third largest oil importer and a small but growing consumer and importer of natural gas, is seeking “security of supply” and the diversification of its imports away from the Persian Gulf and the sea lines of communication. Russia, the world’s second largest oil producer and exporter and the world’s top producer and exporter of natural gas, is pursuing “security of demand” and the diversification of its exports away from Europe. However, the development of the infrastructure necessary for the cost-effective delivery of large volumes of energy from Russia to China has not yet materialized despite more than a decade of bilateral negotiations and repeated statements by both Beijing and Moscow of their intention to tighten their energy embrace. China-Russia energy relations are stuck in a protracted and uncertain courtship because the forces driving China and Russia apart outweigh, but do not fully mitigate, the forces propelling them together. Despite the attraction each holds for the other as an energy partner, the enormous potential for bilateral energy cooperation remains largely unfulfilled. Not only have historically developed mutual mistrust and lack of understanding contributed to commitment fears in both countries, but China and Russia also have not been equally interested in deepening bilateral energy ties at the same time. During the 1990s, when oil prices were low, Russia pushed for expanded energy cooperation, but China—which was reluctant to invest in expensive infrastructure projects and was intent on taking advantage of the buyer’s market to extract maximum price concessions from the Russians—was in no hurry 5 Sino-Russian Energy Relations An Uncertain Courtship Erica S. Downs Sino-Russian Energy Relations 147 to make binding commitments to cross-border pipelines. The rise in world oil prices after the turn of the century turned the tables. China, motivated by its surging energy demand and concerns that energy might become a constraint on the country’s rapid economic growth, became more eager to “settle down” with its neighbor to the north. In contrast, Russia became increasingly reluctant to commit to deeper energy integration with its neighbor to the south in large part because of the intersection of fears about China’s rise with the role that energy exports play in Russian foreign policy and domestic politics. The global financial crisis and the fall in world oil prices, however, facilitated a breakthrough in bilateral energy relations, with China lending cash-strapped Russian energy companies US$ 25 billion in exchange for the completion of an oil pipeline to China and a 20-year oil supply contract. This chapter examines the current state of China-Russia energy trade, the forces of convergence and divergence shaping their energy relations, the role that energy plays in the broader bilateral relationship, and some of the factors that might strengthen or weaken energy cooperation between China and Russia. The State of the Energy Relationship China-Russia energy trade has grown rapidly over the past decade. Russian crude oil exports to China increased from less than 1,000 barrels per day (b/ d) in 1995 to 321,000 b/d in 2006, only to fall to 292,000 b/d in 2007, largely because Russian firms found it more profitable to sell to European customers (see figure 5.1).1 In 2005, Russia accounted for 11 percent of China’s crude oil imports and China accounted for about 4–5 percent of Russian crude exports. Almost 80 percent of China’s crude oil imports are supplied by the Persian Gulf and Africa (see figure 5.2), and a little more than 80 percent of Russian crude exports are delivered to Europe (see figure 5.3). Russia currently does not send any natural gas to China. Forces of Convergence There is great potential for the expansion of China-Russia energy trade. China ’s rapidly growing demand for oil and natural gas complements Russia’s substantial reserves of both. Beijing seeks to diversify China’s energy imports away from the Persian Gulf, while Moscow aims to diversify its energy 148 Erica S. Downs 1 Figure 5.1. China’s Crude Oil Imports from Russia, 1995-2007 0 50000 100000 150000 200000 250000...