President Putin’s upcoming visit to Beijing (20-22 May 2014) has once
again raised expectations that a gas contract will finally be signed after a decade
of negotiations. We have witnessed a similar ‘fever’ prior to every
Russian-Chinese summit for the last couple of years. Let us have a glance at
how Russia and China have repeatedly failed to agree or... how they have been
faking their negotiations.
The very
first agreement, which envisioned the construction of a pipeline and the
deliveries of Russian gas to China, was reached during President Putin’s visit
to Beijing in October 2004. Two years later, another agreement followed and the
major contours of a future contract were made public. Russia’s proposal
entailed the construction of two gas pipelines, along the western and eastern
routes, to Xinjiang and coastal China. The total volume would amount to 68
billion cubic meters (bcm) per annum, 38 bcm for the western route and 30 bcm
for the eastern one (Russian gas exports to Europe hovered between 120 and 130
bcm).
Already then
it was the price which seemed to be the major obstacle. The price offered by
China was at the level of US$ 100, while Gazprom’s price for gas on the
European market stood at US$ 250. In practice, however, neither side was
determined to strike a deal.
For Russia,
the talks with China were a way Moscow could put pressure on European states.
The plan was for the western pipeline (named the Altai pipeline) to be supplied
from the Western Siberian gas fields, i.e. the very source of deliveries to
Europe. Demonstrating the possibility to ‘switch sides’, Gazprom attempted to
convince the European companies to renew long-term gas contracts and to prevent
the anti-monopolist regulation of the EU gas market. At that time, China’s
demand for gas remained limited, especially given that in 2006 Beijing signed a
contract on a gas pipeline from Turkmenistan.
Following
the 2008-2009 global economic crisis, Gazprom, faced with waning European demand
and the disadvantageous EU law, seemed much more interested in striking a deal with
China. The Russian government kept insisting on the priority of constructing the
Altai pipeline first. For Moscow the pipeline to China continued to be primarily
an element of its policy towards the European Union, providing convenient leverage
and increasing its bargaining power. The western gas pipeline was also supposed
to discourage China from finalising a gas agreement with Turkmenistan. In this
case Moscow clearly underestimated Chinese resolution in acquiring access to
gas supplies from Central Asia. The eastern route was regarded by Gazprom as a
future development.
The series
of agreements which followed between 2009 and 2011 seemed to conform to
Russia’s vision of gas co-operation with China. According to declarations from both
sides, new details were agreed almost every three months. A comprehensive
agreement on the western gas pipeline was allegedly reached in September 2010. This
document foresaw gas deliveries to begin in 2015, with a volume of 30 bcm per
year. In mid-2011 Gazprom went as far as declaring it would be concentrating on
the Altai pipeline and abandoning the eastern route.
On the
surface, the price remained the only hurdle. But there were more factors which
spoke against the feasibility and profitability of the Altai gas pipeline. Even
though China’s demand for natural gas skyrocketed, Beijing’s bargaining
position vis-à-vis Russia strengthened. Having secured access to alternative gas
sources – constructing pipelines from Turkmenistan and Myanmar and LNG
terminals – China felt no pressure to close talks with Russia without obtaining
serious concessions. China’s primary needs for gas were concentrated on the
eastern coast. The western route, promoted by Gazprom, would require additional
investment in Chinese domestic pipeline infrastructure. Moreover, even
Gazprom’s own plans, the so-called “Eastern Gas Programme”, assumed that the
deliveries to China along the eastern route are necessary for the project to be
profitable.
The Altai pipeline made no economic sense either
to China or to Gazprom. Why did Russia promote this route so stubbornly? The
only logical conclusion is that as late as the end of 2011 at least one of the
sides was conducting negotiations on the western gas pipeline in bad faith. The
Russian-Chinese talks were just a facade, which was supposed to help Gazprom gain
concessions in the European market. Real negotiations started in early 2012,
when Gazprom and CNPC dismissed the Altai project and re-focused on the eastern
gas pipeline.