[스크랩] Russia ? China pipeline: Drag Nah Osten or Ex Oriente Lux?

 [유라시아시사분석 제 40호]

Russia – China pipeline: Drag Nah Osten or Ex Oriente Lux?

 

Andrey Kovsh

School of International Relations

St. Petersburg State University (Russia)

 

Why the title of this short article sounds so strange and what does it mean in the given context? Motto “Drang nach Osten” (German “push to the East", "push eastward” or “drive toward the East”) is a term to designate German expansion into Slavic lands in XIXth century. These words are also German nationalist slogan. According to Encyclopedia Britannica, the term originally referred to the eastward movement of German settlers in the XIIIth century but was resurrected by Adolf Hitler in the XXth to describe his plans for acquiring eastern territories. So, in a modern world “Drang nach Osten” means an attempt to expand the sphere of influence of certain country or political regime (not necessarily to the East, but mostly to).

The second part of the title “Ex Oriente Lux” is Latin for “the light comes from the East”. It’s a short paraphrase from Evangelic story about the The Nativity of Jesus. “Vidimus enim stellam ejus in oriente, et venimus adorare eum” that means “We say the star on the East and come to bow unto it” (Gospel of Matthew, 2:1). Later the initial meaning was lost and today this motto figuratively means that greater wisdom and deeper spirituality can be found in the East or can come from there.

What is the Russia-China “The Power of Siberia” pipeline: Russian Drang nach Osten toward China in attempt to expand export markets for its waste hydrocarbon resources alongside with sharp decline of oil and gas prices on the world market? Or this project can be referred to Chinese Ex Oriente Lux to Russia in an attempt to get direct access to Russian enormous resources and provide the declining Chinese economy with a new blood. (As we consider that the oil is the blood of economy.) What this pipeline should look like? Is it a tie that will connect two superpowers forever and enhance their ambiguous alliance? Or it's Ariadne's clew from the labyrinth of Western sanctions to Russia? Or it's the future Golden Apple of Discord that can lead to unpredictable consequences not only on regional, but on the global level?

The agreement on construction Russia-China pipeline, a.k.a “The Power of Siberia” was reached after almost decade of discussions. The story began at the beginning of 2000-s when Putin became Acting President in accordance with the Constitution of Russia as former Russian President Boris Yeltsin announced about his resignation on 31 December 1999 during his New Year's speech on TV. It is worthy to mention that the procedure by itself was technically conducted strictly in the framework of the Russian Constitution, but the medal has the other side. The case is that Putin was informally assigned by Yeltsin to be his successor in presidential chair. Exactly the next day on the place Putin signed a law about personal protection of the former President from any kind of prosecution in the future. Many former government officials agree that Putin had been chosen by Yeltsin as the future President already in the middle of 1999. The next trick was Putin's first Presidential election campaign. While his opponents (communists and democrats) had been preparing for an election in June 2000 (according to the Constitution), Yeltsin's resignation resulted in the shifting of the Presidential elections to March 2000. So, Putin won in the first round with 53%.

During his first Presidential term Putin was not so ambitious and economic situation in Russia was really terrific although not so bad as in the middle of 1990-s. The more important thing is that the oil prices fluctuated in the narrow corridor ($20-35) until the middle of 2000-s giving moderate revenues from the oil export to Russia. The situation dramatically changed after the second Presidential elections in 2004 where Putin got 71%. Ironically, oil prices started to rise just after Putin was re-elected. In May 2004 the price per barrel was $40 and touched $51 in November, almost 80% higher than at the beginning of the year. New prices brought new ambitious and new expensive and extensive projects.

During visit to China in 2006 Putin announced the new project of “Altai” pipeline (Western route) from Russia to China to be constructed till 2011 with the capacity of 80 bcm/y. However, at the end of 2008 a lot of rumors that “Altai” is postponed to 2030 spread to mass media, but officials from Gazprom and Ministry of Energy denied it. At the same time Gazprom started to work on “The Power of Siberia” (Eastern route). It has almost 5 years of price negotiations without any light at the end of the tunnel, and suddenly the enormous 30-years US$400 bln contract for a delivery of 38 bcm/y was signed at deep night of 21 May 2014. And the most intriguing thing is that the price wasn't officially announced officially and we still have no clear information about the exact price. There are a lot speculations on this and different experts estimate the possible price from $350 to 300 or even $250/tcm. The median price of Russian gas for Europe is about $380 and Turkmen gas costs China slightly less $322/tcm.

However, why this “biggest gas deal of our century” as tenderly called his creature its' godfather President Putin was signed in a rush? The answer moves us to the other end of fragile Russian empire. At the end of February 2014 Russian Federation invaded Crimea, the part of independent Ukraine. Masked Russian troops without any insignias (that could be judged in according with the Geneva Convention on War Crimes as military crime by itself) took over the Supreme Council of Crimea, and captured strategic sites across peninsula. This led to creation of completely illegitimate pro-Russian puppet “government” that called for an unconstitutional independence referendum. The pretty same scenario was whomped up by Kremlin puppetears for Donetskaya and Luganskaya Oblast, two parts of Eastern Ukraine. This plan failed so the war in Donbass stared. That explains a lot about the rush in which the gas contract was signed.

Russian government tried to secure the main Russia's revenue source having concerns about its nearest future and the reaction of the world community to the possible military intervention in Ukraine and support of paramilitary groups in Eastern Ukraine. The step that was described by many experts citing Putin without any criticism as a genius gas deal of a century, in reality was just silly attempt to avoid the future situation when the Chinese negotiation position supported by Western sanctions against Russia could be significantly enforced. The military invasion to Crimea with further annexation and direct engagement into war in Donbass pushed Russians to put all their passion into an attempt to persuade China to sign the gas contract as soon as possible. And, probably, it's the main reason why we still have no solid information about the exact price. Foreseeing future troubles in oil and gas industry (and it really get a bunch of troubles at the end of the day) Russia made a step to China after years of fruitless negotiations. Six months later, the Memorandum of Understanding for “Altai” pipeline was signed.

The official opening of pipeline on 1 September 2014 was designated by welding two separate pipes that were not connected to anything else. President Putin and Deputy Prime Minister of the PRC's State Council left their signs on a successfully welded pipe, then Gazprom CEO Alexey Miller loudly declared that construction of “Power of Siberia” was just begun. After official opening ceremony was the time for the cheery celebrating concert. The cost of this worldwide-significance event that should bring a deal that will bless by the prosperity and happiness both nations (or, at least, some people) was… $2 mln. (or 94 mln. Russian roubles). But the most funny truth of all this deal, that the place was 400 km away from the real pipeline route. At that time there was no even construction contractors were chosen. It shows again a wonderful speed of decision-making process in this long-lasting deal. Also we can see the time horizon of new enormous black hole for Chinese and Russian budgets. The last assumption was proved at the very next day when one the sub-contractors company associated with personal Putin's friend Arkadii Rotenberg announced that it won the above-mentioned $2 mln. “celebrating” contract.

In accordance with preliminary estimations the pipeline price is over $25 bln. This price doesn't include field exploration, but only pipeline that should go alongside (at least partly) with the existing Eastern Siberia-Pacific Ocean oil pipeline (ESPO). Today Russia is desperately looking for investors and it's still desperately difficult to find any in current political deadlock where Putin put Russia invaded Ukraine. China started to construct its side of pipeline at the summer of 2015. At the precisely same time in mass media appeared the information that the pipeline completion had postponed for more than a half of a year. The case is that the contract by itself was signed at May, but entered into force only in October of 2014 when the intergovernmental agreement was signed as it was officially declared by Mr. Miller. According to unofficial sources the contract really came to force in May of 2015 but these seven months governmental agencies had settled all bureaucratic procedures and Russian side was looking for investment. Finally, the way to find money was proposed by Russian government that assumed the possibility of 50% concession of oil and gas field exploration to China. Anyway, the project launch date has been postponed almost for 2021 and it was definitely a bad start.

Finally, who will win more in this big gas game? Eventually, both will win but one will win more than the other. From the one side, Russia is desperate for Chinese energy market in an attempt to secure its gas revenues. It's still not clear what about the price as was mentioned above. CNPC tried to tie the price for Russian gas to Henry Hub prices, but Gazprom claimed that the price should be tied with oil prices as they are more predictable. This approach had some logic as Gazprom have being engaged into multi-billion contract. Finally, even without information about the final price experts told that is was a stumbling block of the negotiation process. The gas price could be tie to JCC (Japanese Crude Cocktail) price or to Europe Brent Spot Price FOB without leverage. Gazprom and CNPC both keep silence on that matter. To the mentioned the official opening of pipeline of 1 September 2014 the oil price was $103/barrel. But up today it fell in price by half. “Power of Siberia” pipeline together with the development of the Chayandinskoye gas field cost about $55 bln. And this investment is paid off only if the price of gas on the Chinese border is $340-360/tcm. In case the gas price under contract provisions tied to the oil prices gas should cost no less than $100/barrel. There is a high possibility the price wasn’t designated in signed agreement at all. That explains why we still have no proved information about it. At least some information about the price just must leaked away keeping in mind an amount of contract and number of people engaging in. In this sense Russia lost the game of bargain for a final price and is continue to lose as the construction works cost a lot.

What is about China? China needs Russian recourses. In 2013 China explored 121 bcm of natural gas, but consumed about 168 bcm. According to Chinese forecast at 2020 China will consume more than 400 bcm/y. The result of impressive growth is seeking more ecological energy source than coal is. Today China is the largest producer and consumer of coal in the world and accounts for about a half of the world's coal consumption. Coal comprised nearly 66% of China's total energy consumption in 2012 that caused a lot of ecological problems. In accordance to Chinese plans the gas share in total energy consumption should rise up to 10% at 2020. In case of successful implementation Chinese dependence on high-priced LNG will decline. There are 9 main LNG suppliers as for 2015 totally providing slightly more than 25 bcm/y. Pipelines from Turkmenia and Myanmar deliver only half of this amount, 12 bcm/y. China needs more suppliers to cover fulfill its demand-consumption gap.

What is the conclusion? Currently in this multi-billion gas game China outplays Russia. And Russia is in a sanctions deadlock. It's definitely not “Drang nach Osten” for sanction-deadlocked Russia looking for investments for its enormously ambitious as ambitiously enormous incredibly expensive and occupied by corrupted money-suckers federal officials pipeline project. China is definitely light from the East, “Ex Oriente Lux”, and probably is rather the last light of hope for Putin's regime to obtain money for survival of oil-needling Russia. Beijing is in much favorable position than Russia. It has money that Russia thirsty for and has alternative gas supply sources. China also has a great chance to have 50% of explored oil and gas fields.

Overall impression from this enormous project brings a reminiscence of Soviet era planned economy projects like The Baikal-Amur Railway. Ironically it was built as a strategic alternative route to the Trans-Siberian Railway, especially along the vulnerable sections close to the border with China. Economically inefficient and unprofitable infrastructure project turned into completely outdated railway surrounded along the route by former boomtowns turns into deserted ruins with unemployed and poor population.

And there is one more important point. This is the first pipeline ever have built directly between two nuclear powers (we didn't consider planned Iran-Pakistan-India pipeline project here as Pakistan is more to be transit state than supplier to India). The history of Sino-Russian relations is fool of mutual mistrust and hostility. In 1969 two countries were close to war and full of hysterical propaganda from both sides. Now two nuclear giants are trying to be handcuffed to each other. So, probably, it's not just light from the East for Russia, but only the glow of future conflict or even… nuke explosion… Who knows?

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