Wednesday, June 29, 2011

China's Growing Energy Appetite and Strategy

Analysts who follow the energy "Great Game" being played between Russia and the Rest are turning their attention away from the European front, toward the growth of China. Asia Times' correspondent Pepe Escobar explains the dynamics of Chinese energy growth in the magazine The Nation. China is the world's fifth largest oil producer, at 3.7 million barrels per day, just below Iran and slightly above Mexico. China consumes 10% of the world's production, second only to the United States' 27% share and triple its consumption of 30 years ago. The International Energy Agency estimates that Chinese oil consumption will reach 11.3 million barrels a day by 2015.

China's top three oil suppliers are Saudi Arabia, Iran and Angola. China has invested $120 billion in Iran's energy sector over the past five years (so much for UN sanctions!), and purchases 14% of its imported oil from the Islamic Republic. The Chinese energy company Sinopec has agreed to invest an additional $6.5 billion to build oil refineries there. China is also the principle supplier of machinery and parts used in Iran's oil production.

Escobar reports that Saudi Arabia has tried to wean China away from its reliance on Iran, offering to supply the Chinese with the same amount of oil it buys from Iran--but at a discount. China's interest in a strategic relationship with Iran has trumped profit, however, and Beijing rejected the Saudi offer. Christina Lin, who follows Chinese military developments, reports that China views Iran as a means of counterbalancing U.S.-supported Arab monarchical states. This does not mean the Saudis are frozen out of the market, however; over half of Saudi oil exports are now to Asia, as opposed to 14% to the United States. Saudi Aramco owns refineries in both Qingdao and Fujian provinces, and is China's principal trading partner in the Middle East.

Most of this oil comes to China through two naval choke points: the Strait of Hormuz and the Strait of Malaccca. 20% of China's oil imports transits Hormuz, and a full 80% of its imports has to go through Malacca. To overcome this maritime vulnerability, the Chinese are trying to develop overland supply routes from Central Asia. As an example, the Kazakh oil fields lie close to the Chinese border and the Chinese company financed a pipeline to deliver its oil to the Middle Kingdom. The Chinese have become so close to the Kazakhs that there have been four heads-of-state summits in the past four years. President Hu Jintao has declared that the relations between the two countries are a "strategic partnership of long-term stability, good-neighborly friendship and win-win cooperation," according to Robert Cutler in the Asia Times.

Another source of petroleum was the strife-torn country of Libya. According to a report published in, China has invested large sums of money in Libya. There had been 36,000 Chinese in the country before hostilities began, working on 75 joint venture projects with an additional 50 projects in the pipeline. Each year, China was importing 7.4 million tons of petroleum from Libya.

China has also begun receiving Russian oil via the Eastern Siberia-Pacific Ocean (ESPO) pipeline. China lent the Russian-state run company Rosneft $25 billion to build the line, and the plans are that it will bring 15 million tons of petroleum annually for the next 20 years. This is equivalent to 6% of China's 2010 petroleum consumption, according to

China's growing energy appetite, however, cannot be satiated by Russian and/or Central Asian pipelines. As much as they might fear the vulnerability, they will continue to be reliant on a maritime delivery route. To protect themselves, they are developing a "string of pearls," a series of Chinese naval bases stretching from the straits of Hormuz to the energy-hungry cities of China's east coast. According to Christina Lin, these pearls include upgraded military facilities on Hainan Island, an upgraded airstrip and oil drilling platforms in the contested islets of the South China Sea, a canal in Thailand, and intelligence-gathering facilities near the Strait of Malacca; ports in Burma, Bangladesh, and Sri Lanka; a naval base in Gwadar, Pakistan; and facilites in Port Sudan. The string of pearls gives the Chinese military an overseas presence for the first time in modern Chinese history.

Other Central Asian countries are jumping into the game: following the Kazakh example of getting the Chinese to finance oil projects, Turkmenistan has turned to China to finance natural gas projects. the Turkmen have the world's fourth largest gas reserves, and they sell their gas to China, Russia and Iran. Bloomberg Businessweek reports that Turkmenistan is doubling the amount of natural gas it had originally planned to sell China, and will be shipping 60 billion cubic meters per year by 2015. China is a welcome new market for Turkmenistan, who lost its previous main customer (Russia) after a pipeline explosion disrupted deliveries to that state.

Overall, China's natural gas consumption is expected to grow by 22.6% in 2011, according to a report released by the research arm of China National Petroleum Corporation (CNPC), as reported by the China Daily. Consumption will grow from 106 bcm in 2010, to 130 bcm in 2011,and to 230 bcm in 2015. Domestic output of the fuel will rise 58% in the same time period, reaching 150 bcm in 2015. The CNPC report verified that China imported 4.4 bcm from Central Asia in 2010, and has opened negotiations with Russia for an additional 70 bcm per year by 2015.

With such astronomical projections of increases in petroleum and natural gas consumption, China will be first in line for any production increases from anywhere throughout the world. The current relaxation in oil and gas prices will not be able to be sustained in the mid to long term in the face of Chinese energy demands.

Will Gazprom Purchase Greek Gas Company?

Stratfor analyst Marko Papic believe the European Union has reduced its support for Nabucco, in favor of the Trans-Adriatic Pipeline (TAP) and the Italy-Greece-Turkey Interconnector (IGTI), according to a report by Papic believes that the Russian gas giant Gazprom has its eye on a key link to both of these systems, the Greek natural gas company DEPA. "As the state-owned national gas company in Greece, a stake in DEPA by Gazprom would give the Russians considerable say in what projects are transiting Greece," he said.

Why would Gazprom want to control DEPA? Papic explains that all three of the Southern Corridor projects (Nabucco, TAP, ITGI) are supposed to be routes to bring non-Russian gas to Europe. If Gazprom controlled DEPA, however, Papic believes it would undermine this strategy and allow Gazprom to maintain its position as near-monopoly supplier. "The Russians are looking to slowly geographically block out as much as possible, and Greece fits into that. One possiblility would be that they would use their influence in Greece's natural gas infrastructure to pump their own gas through these supposed alternatives." CNBC reports that the TAP managing director, Kjetil Tngland, concurs that a likely motivation for a Gazprom takeover is the increasing influence that Gazprom could exert over discussions on regulation and transportation.

Under the European Third Energy Directive, energy suppliers are supposed to "unbundle" their control of energy transport networks. So, how would ownership of DEPA help Gazprom? According to Papic, the Third Energy Directive has not been successful in breaking Gazprom's control of other projects. "We've seen in Poland, for example, how the close relationship between the Polish national gas compnay and Gazprom has allowed Gazprom to have a say in how Warsaw was going to regulate the Third Energy Directive...The independent energy regulator ended up not really being as stringent as the European Commission would have wanted," he said.

Comment: The government of Greece is considering privatizing DEPA. With the Greek government in deep financial crisis, the possibility of Gazprom purchasing DEPA at firesale prices is a real possibility.

Monday, June 27, 2011

TAPI Being Discussed, Not Built

Plans to build a Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline continue to be discussed, despite the lack of security in transit countries that would allow the project to be built. In January, Indian External Affairs Minister S M Krishna met with his Afghan counterpart to discuss the pipeline, which has the support of the Asian Development Bank, according to This was followed by a meeting between Afghan president Hamid Karzai and Russian President Dmitry Medvedev, after which the leaders expressed a willingness to cooperate on a range of energy projects, including TAPI, according to the Tehran Times. In a May meeting between Pakistani President Asif Ali Zardari and Medvedev, the governments announced Moscow may join the project with Gazprom serving as one of the suppliers, according to UPI.

To obtain Russian approval of the project, Karzai agreed that Gazprom could be involved in the construction and operation of the project, according to Central Asia newswire. The announcement was in contravention of the wishes of Turkmenistan President Gurbanguly Berdimuhamedov, who rejected Gazprom's involvement in the project in August 2010. The Turkmen president had characterized Gazprom's attempted involvement at the time as a Russian attempt to meddle in Turkmenistan's energy affairs.

The principle supporter of TAPI since the 1990s, and the force behind the Asian Development Bank's endorsement of the project, is the United States. According to U.S. Assistant Secretary for South and Central Asia Affairs Robert O. Blake, Jr., "The country's substantial natural resources may make Turkmenistan one of the top five countries worldwide in terms of gas reserves," which have "attracted the attention of many countries intersted in securing Turkmen gas for various pipeline projects...The U.S. has welcomed renewed interest in TAPI." Blake credited President Berdimuhamedov for "almost single-handedly" resurrecting TAPI, reports Blake was speaking at Rice University in Houston, and he said that if TAPI were built, it would occur without Russian or Chinese involvement. "Washington's vital interest in TAPI includes having an alternative route for Central Asian gas that will bypass the Russian pipelines' network...India has objected to any Chinese firm or consortium being given contracts related to the building of (TAPI)...The U.S. has supported a way to break Russia's and China's monopoly on exporting Caspian basin energy to the rest of the world." Blake did not explain, however, how to prevent Afghan President Karzai or Pakistan President Zardari from bringing Gazprom into the equation. In fact, in late May Pakistani advisor on petroleum and natural resources Assim Hussain signed a Memorandum of Understanding with Russian energy Sergi Shnatro pledging cooperation on a number of Pakistani energy projects, including TAPI, according to Oil and Gas Journal. Both presidents witnesses the signing ceremony.

Should TAPI be constructed, the President of the Russian Union of Oil and Gas Producers Gennady Shmal speculates that Turkmenistan would not have enough gas to fill both TAPI and Nabucco. "A gas pipeline to Afghanistan, Pakistan and India is of great geopolitical importance for Turkmenistan and, therefore, has more chances than Nabucco. If it is built, there will be virtually nothing left for Nabucco, which has no alternative resource base. TAPI's construction will seriously complicate the prospect of gas deliveries for Nabucco," he said according to the Voice of Russia. Such concerns remain of little interest, however, until it can be shown that Afghan and Pakistani insurgents would ever allow the project to be built.

Friday, June 24, 2011

US Policy for Russia and Central Asia

Richard Morningstar recently spoke before the US House Foreign Affairs Committee, and outlined United States policy toward Russia and Central Asia, reports the Asia Times. Morningstar reaffirmed that "Europe is our partner on any number of global issues from Afghanistan to Libya to the Middle East, from human rights to free trade." As a result, the United States intends to be deeply involved in Europe's energy security. In that regard, the US will work for Europe's "diverse energy mix" in regards to supply, transportation routes, and types of energy.

Morningstar then made the following points:

  1. The US will encourage Central Asian and Caspian countries to find new routes to market;

  2. The US will push for the privatization of the energy sector;

  3. The US remains as committed to the Southern energy corridor as it was under presidents Clinton and Bush, and will promote all three possible routes (Nabucco, ITGI and TPA) as possibilities;

  4. Turkmenistan can be a major supplier of gas to Europe through the Southern Energy Corridor;

  5. The Baltics should be integrated into the European energy market so it is not as vulnerable to Russian pressure;

  6. The US will challenge Russia's efforts to monopolize Ukraine's energy sector;

  7. European countries should not negotiate energy deals unilaterally with Russia, but should negotiate together as a single energy market;

  8. Europe should consider shale gas as an alternative to Russian natural gas; and,

  9. Europe should not allow Gazprom to penetrate the European retail market.

Morningstar's message places US interests in the region clearly in opposition to Russia's. Diversity in energy sources, new Caspian energy routes, the Southern gas corridor, etc. all are designed to limit Russian energy dominance of the Eurasian land mass. What was missing from Morningstar's testimony, however, were plans on how the United States was going to implement the goals he outlined. Implementation will require more attention to the region than the current US administration has given it, to date. While the Ambassador can claim that the commitment to the Southern corridor is as strong today as previously, the last two presidents at least had ambassadors appointed to all the countries in the area--something President Obama has not done after three years in office.

Russian Energy Policies Assessed

The Heritage Foundation's senior researcher for Russia, Ariel Cohen, recently outlined the United States' assessment of Russia's energy policy. Cohen was testifying before the US House Committee on Foreign Affairs, according to the Asia Times. Cohen said the United States believes:

  1. The Kremlin views energy as a tool to pursue an assertive foreign policy;

  2. Russia's is attempting to exclude the US from Central Asian and Caspian energy markets;

  3. Russia is using energy to "re-engage" with India, Southeast Asia, the Middle East, Africa and Latin America;

  4. Russia is forcing neighboring countries to use the Russian pipeline system for energy exports;

  5. Western countries are blocked from entering into Russia's energy sector by an absence of the "rule of law;"

  6. Russia is not interested in developing energy ties with the United States.

Cohen said the United States has identified a number of geopolitical concerns arising from these policies:

  1. European demand for energy is projected to grow, leading to a greater dependence on Russia. This has serious implications for Russo-European relations;

  2. The German decision to abandon nuclear energy and increase energy imports from Russia could eventually weaken European unity and the underpinnings of NATO;

  3. Russia wants to be a part of the European energy distribution system, and the energy retail market. If successful, it raises the question of Europe being able to side with the US on key issues;

  4. Russia is supporting the Shanghai Cooperation Organization (SCO) to keep the US out of the Central Asian energy preserve, and has begun discussions with Pakistan about the mechanics of building the Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline Moscow is outflanking the United States in the subcontinent.

A Russian diplomat confided similar conclusions to Sentaku Magazine as reported by the Japan Times, noting that the Kremlin's strategy is to decouple Western Europe from the United States, based on its abundant natural resources. Moscow wants to create discord among NATO members and block any expansion of NATO by promoting bilateral ties with individual NATO countries.

Russia's policies are fueled by energy exports. But can Russia keep up the pace? This question needs to be divided into two subfields: oil and gas. Prime Minister Vladimir Putin argues that Russia can continue its production of oil at 500 million tons annually for decades, but it will require investments of 280 billion dollars over the next ten years, Oil and Gas Eurasia quoted the Xinhua news agency.

The Russian Ministry of Natural Resources concurred with Putin's assessment, but was more pessimistic about how long the production can last, says AFP. Russia is tapping into its existing light crude reserves in western Siberia at alarming rates while failing to replace them with new finds in regions that sit further away from Russia's industrial heartland. According to the study, oil quality was deteriorating steadily, and Russia can only sustain its current production rate for another 13-15 years. Most of the oil that Russia possesses (70%) is heavy crude that is hard to recover and cannot be used on the world market without additional processing.

Russian natural gas production has grown slowly, only 0.5% from 2001 to 2009, according to the president of Coburn International Energy Consultants, Leonard Coburn. In 2009, production fell almost 20% because of Russia's closing of the Ukrainian pipeline system for two weeks in January 2009. Gazprom, the producer of 85% of Russian gas, is delaying investments in new production, trying to husband domestic resources while purchasing gas from other countries. This strategy is being challenged, however, by Central Asian countries selling their gas to China instead of to Russia. Coburn notes that when Turkmenistan opened its gas pipeline to China in December 2009, Russian President Dmitry Medvedev immediately launched a tour of Central Asian capitals to repair relations. The establishment of a new customer for Central Asian gas was a wakeup call for the Russians, that Central Asia has the ability to maintain some independence.

Russia is also looking to China as an energy market. The International Energy Agency (IEA) told the St. Petersburg International Economic Forum that European demand for gas was stagnating, according to a Financial Times blogger. The IEA's chief gas analyst told the Forum that China would be the main driver of increasing gas demand, accounting for one third of global growth. The IEA predicted that the global growth in gas would be 2.4%, so that would mean that the Chinese would account for .8% of global growth in gas consumption.

What conclusion can we reach? Russia has a 15 year window to throw its energy weight around. After that, it gets difficult. It appears that Russia has plenty of natural gas, but the weak economic recovery and the shale revolution is slowing Europe's demand for the product. Russia needs the sale of gas to maintain its own economic recovery, and that means they will have to turn to China as a new market. American concerns are valid for the next decade but, in the long run, Russia's energy superpower status will begin to fade.

Russia Buying Belarus

Despite the December 2010 creation of a Russian-Belarusian common economic zone, and the January agreement between Vladimir Putin and the Belarusian prime minister Mikhail Myasnikovich to provide $4.1 billion in subsidies to Belarus through the lifting of tariffs on Russian oil, the Belarusian economy is near collapse. Russia has decided to cometo the rescue, but at a price--Belarus has to sell its half of its gas pipeline network, Beltransgas, to Gazprom. Reuters quotes an EU diplomat as stating "Russia is not going to give free money to Belarus. They want a piece of Belarus in return." In the same article, Russian international relations professor Kirill Koktysh says, "Loans will be granted in an amount that is enough to avert a collapse but in no way enough to preserve the status quo." What is Russia's goal? According to Fyodor Lukyanov, editor of the journal Russia in Global Affairs, the Kremlin's ultimate hope is "to make it so that Belarus is oriented, irreversibly and forever, toward economic cooperation and integration with Russia."

The first step in this transformation of the Belarusian economy is privatization of Belarusian resources, and Gazprom's purchase of the gas pipeline. Gazprom already owned 50% of the pipeline before the economic crisis. On May 20, PM Myasnikovich told reporters that Gazprom would acquire the remaining 50% for $2.5 billion, the same price they paid between 2007 and 2010 for the initial 50% share. Russian finance minister Alexi Kudrin intimated that additional funds--up to $9 billion--could be made available for other state assets such as oil refineries, the main mobile phone provider, and a potash production complex, according to Reuters.

Kudrin has offered an additional $3 billion loan, but then denied the money would come from Russia. Instead, Kudrin said the loan would come from a Russian dominated regional grouping, the Eurasian Economic Community, according to RadioFreeEurope. Russia will use its allies' money to obtain its own geopolitical advantage.

Of course, Russia is not the only country trying to buy Belarusian assets. Oil and Gas Eurasia reports that Venezuela may seek shares in Belarusian refineries. Belarus ambassador to Venezuela, Valentin Hurinovych, said "We need this so that they can have their own assets and allow their capital to be part of our industry...I think that Venezuela will soon be our partner." Venezuela is already in the country in a joint venture to exploit Belarusian oil fields.

As Lukyanov noted, Russia's purchase of Beltransgas is not just the purchase of an energy asset, but it is the purchase of Belarusian sovereignty. Once Russia controls the Commanding Heights of the Belarusian economy, no leader of Belarus will have the room to decide against Moscow's interests.