Chapman expert James Coyle explains the realities of terrorism and security after Paris, San Bernardino and North Korea

Q&A feature in the Orange County Register by Jonathan Winslow, published on January 11, 2016. To access the original article, click here.

Oh, the times, they are a changin’.

In the wake of the attacks on Paris and San Bernardino, the world is facing yet another paradigm shift – one of terrorism’s lamentable place in our world.

While still a relatively young insurgency, the methods of the Islamic State render the group a rowdy foe. Even now, it’s working to construct the state that al-Qaida never managed to achieve, leaving the corpses of former countrymen in its wake.

Coupled with self-radicalized terrorists born within our borders and molded by the Internet, these new realities are leaving governments scrambling to keep their citizens safe in an unstable world.

Further complicating the world stage, North Korea last week conducted a nuclear test – one it claims was a successful hydrogen bomb detonation. Condemnation has rained upon North Korea from the United States, Japan, South Korea, China and the United Nations, though the state of world affairs leaves what action – if any – will be taken up in the air.

James Coyle, director of Chapman University’s Center for Global Education, is an expert on terrorism, national security strategy and Middle East politics – among many other topics.

Co-author of “Politics in the Middle East: Culture and Conflict in the Middle East,” published by Prentice-Hall, Coyle also has held several positions in the federal government. Over the last three decades, Coyle has been director of Middle East studies at the U.S. Army War College, first secretary for political-military affairs at the U.S. Embassy in Ankara, senior political analyst for Palestinian affairs and special assistant to the FBI/New York Joint Terrorism Task Force.

We sat down with Coyle to discuss world affairs and the new realities of terrorism after Paris and San Bernardino.

QUESTION Given the growth of the Islamic State group in recent years, did the Paris and San Bernardino attacks come as a surprise or were these types of attacks to be expected?

ANSWER First of all, I'm going to contradict you, if I can. ISIS is not growing any more. ISIS is actually on the retreat. They’ve lost quite a bit of territory in Iraq. They’re being pummeled in Syria. The groups outside of Iraq and Syria that call themselves ISIS, they’re really nothing new.

A lot of these groups, five years ago, were all considered al-Qaida affiliates – now they’re ISIS affiliates. Basically, they’re groups that are unhappy with the governing structures of whatever country they’re in. They’ve chosen to use an Islamic ideology to motivate their base. Before, they were loyal to Osama bin Laden. Bin Laden’s dead and ISIS is on the rise, so they’ve sworn allegiance to them. They’re the same groups, they’ve just changed names in a sense.

Paris is not a surprise to me. Paris was a disaster waiting to happen with the large waves of immigration that had been passing through France, not just in the last year but in the last 50 years. It was just a matter of time until this sort of thing occurred.

San Bernardino is a surprise. First of all, the shooters themselves – it appears their connection to the radical groups overseas was tangential. In reality, these are what the press is calling “self-radicalized” individuals. We haven’t seen that before. There’s not really a lot you can do to stop that. The FBI, since 9/11, has done a very good job of stopping any of these attacks inside the United States, but how do you do that? You penetrate organizations, keep track of them. But if you have a guy and a gal sitting in San Bernardino who aren’t in touch, are not using these groups for support, how do you stop them? It was a surprise, and I think we’ll probably see more.

QUESTION What should the takeaway be from these attacks for policymakers as they work to prevent further attacks?

ANSWER You cannot win this battle militarily. Neither on the battlefields of Iraq and Syria nor using homeland security here in the United States. This is a battle for hearts and minds. Everyone who works this field, from (retired) Gen. David Petraeus on down, will tell you the same thing. Yes, you do have to provide a modicum of security. Granted, but that’s only step number one. You’ve got to win the hearts and minds.

This is the difficult part. The United States can’t really be engaged in that debate. That is a debate within the Muslim community itself. The moderate voices in the Muslim community need to engage with the radical Islamists. There are elements within the Quran that substantiate that Islam is a religion of peace. Surah 5 says that if you kill an innocent man, it’s the same as if you have killed all men in the world. A message like that is antithetical to the message of ISIS. That dialogue has to be encouraged, but we can’t be the ones holding that dialogue. We’re not part of the community, and our voice – because we’re outsiders – is suspect from the very beginning.

QUESTION What are some of the major differences, in goals and methods, to consider when looking at the Islamic State as opposed to an entity like al-Qaida – are we seeing the start of a new age of terrorism?

ANSWER It’s only methodology. The goals are the same. The goals are Islamic rule over Muslim lands. The sole difference that I see is that al-Qaida was looking at this as a future goal. The original goal of al-Qaida was the elimination of the Saudi monarchy. They weren’t even interested in the United States. Eventually, bin Laden decided he could not get rid of the Saudi monarchy, which he called “the near enemy,” unless he got rid of the organization that was propping “the near enemy” up. That was the United States, which he identified as “the far enemy.”

So, even though we remember al-Qaida because of 9/11, that was not the main thrust. The main thrust was the elimination of the Saudi monarchy and the imposition of a more authentic Sharia law on the Saudi peninsula.

Now, in the case of ISIS, they’re not even interested at this point in the Saudi peninsula. Their goal is the establishment of Sharia law throughout Muslim lands, but they’ve actually created a caliphate and are trying to establish a government. They’ve established a caliph, they’ve got taxation services, a military, garbage collection – they’re trying to be an actual state. Al-Qaida never got that far.

In my mind, we’re looking at three separate groups. Al-Qaida is your traditional terrorist organization. It had a central authority in Bin Laden. He and his henchman directed operations around the world, and it was pure terrorism: killing a second party in order to influence a third party for political goals. The second group is ISIS. They’re not really a terrorist group, they’re an insurgency. They want to overthrow the government in Iraq and Syria, replacing it with themselves. It’s an insurgency. We sometimes make the mistake in lumping them together because sometimes insurgents will use terrorist tactics. They’re not trying to influence somebody, they’re trying to set up a state.

Now, you’ve got the third “group,” and when I say “group” I don't really mean an organized entity, more like an amorphous mass. It’s all these people around the world that are self-identifying with ISIS or even with al-Qaida. That’s the group we have to be careful of, that’s the group that’s relatively new. There’s always been that element out there. You have these terrorist waves that come through periodically, this is another wave. What’s different? The Internet.

The Internet not only allows people to become radicalized without ever meeting anybody from the organization, it allows them to communicate with people, order whatever materials you need for a terrorist attack and even publicize what you’ve done in a way that was not possible in the old days.

QUESTION In light of recent events, there have been many reports of religious intolerance – people being assaulted even for just looking how a Muslim is believed to look, and a presidential candidate discussing a ban on Muslims entering the country. Even so, it’s been said that Muslims are the chief victim of the Islamic State. Could you comment on this current state of religious intolerance?

ANSWER If you look from a historical viewpoint, the United States has always had a very strong nativist streak within it. Every ethnic group that comes into this country is opposed by people who were here first. The German Americans didn’t want the Irish to come, the Irish didn’t want the Italians to come, the Italians didn’t want the Poles to come and the Poles didn’t want the Slavs to come. The latest is we don’t want the Mexicans to come, and now we don’t want the Muslims to come.

It happens. It’s true that terrorism makes it worse. I’ve heard the phrase “not all Muslims are terrorists but all terrorists are Muslim,” which, by the way, is not true. There are lots of non-Muslim terrorists out there. But it strikes fear into people and they have a tendency to overreact, simple as that.

What we have to remember is the First Amendment of the Constitution says Congress shall pass no law on the establishment of religion. That’s the Constitution.

QUESTION Cooperation between the United States, China and Russia seems to be a major make-or-break element in dealing with the current state of world affairs. In terms of these relations, what are the biggest obstacles to a united dismantling of Islamic State and containment of North Korea, and how can we hope to overcome them?

ANSWER The biggest obstacle is national interests. The national interest of the United States is not that of Russia or China. Where those interests converge, there can be cooperation. Where they don’t, there cannot be. We would like Russia to cooperate with the United States against ISIS. That’s good, except that leaves the American-backed opposition untouched. That’s antithetical to the Russian national interest, which is to keep Assad in power. (Bashar Assad is the president of Syria.) It doesn’t make sense to cooperate against ISIS when Russia also wants to take out the American-backed groups.

Same thing in North Korea. Yes, both the United States and China are interested in maintaining stability on the Korean peninsula. Both of us are opposed to North Korea having nuclear arms. It sounds easy! There ought to be a large basis for cooperation. In point of fact, however, the Chinese have decided the best way for there to be stability for the peninsula is for North Korea to continue on its way. The concern is that if there were anything to destabilize the North Korean regime, then China would suddenly be inundated with a massive wave of North Korean refuges. Where our national interests converge, it's fine, but eventually you reach a point where our interests and theirs are not the same.

It's a question of where the goals are in the hierarchy. In China’s case, the goals in which the U.S. and China cooperate on in North Korea are lower in the hierarchy than stability on the peninsula.

QUESTION North Korea appears to have conducted another nuclear test. It may or may not have been a hydrogen bomb, but China, the U.S., Japan, South Korea and the U.N. are upset over what happened. Is there any long-term significance to this, or is it just another in a series of provocations by North Korea in recent years?

ANSWER It’s the latter. This is their fourth nuclear test. The first test took place under the Bush administration. There’s now been three tests under the Obama administration. China is not going to allow any sort of significant sanctions to be placed against North Korea. We can count on China to condemn the tests, we can count on them to verbally chastise North Korea, but we cannot count on them to actually support anything that would hurt North Korea.

When the first nuclear test occurred during the Bush administration, the United States actually considered launching a unilateral strike to take out North Korea’s nuclear facilities. They didn’t do it, for a simple reason. Seoul is 40 kilometers from the DMZ, and North Korea has had 50 years to zero in long-range artillery on Seoul. North Korea has chemical warheads – not for bombs, not for missiles, but for good-old-fashioned artillery. The Bush administration received an assessment at that time that if there was an attack and North Korea response against Seoul, you could be talking hundreds of thousands of deaths in the first few minutes. That hasn’t changed, and that’s not going to change. As long as North Korea has the ability to respond that way against an American ally, the United States’ hands are tied. And as we talked about before, when you talk about China and Russia, it’s because of their national interests that they aren’t interested in responding either.

James J. Coyle: We don't have a strategy yet

Published in the Orange County Register on September 10, 2014. To access the original article, click here.

Two and a half years after President Barack Obama ended American military involvement in Iraq, the United States has resumed “limited” air operations in that country. American war planes bombed forces of the Islamic State threatening the Kurdish enclave in the north. The White House is at a loss to explain this tacit admission that the Obama administration’s “success” in withdrawing American troops did not protect American interests in the area.

The President does not know the next step to take. Speaking at a news conference, he admitted “We don’t have a strategy yet.” The lack of planning is a surprise, as a former Pentagon official told Fox news that the President had been given detailed and specific intelligence about the rise of the Islamic state on multiple occasions, and for over a year. The former official described the information as strong and “granular” in detail.

The President’s words may well be his foreign policy epithet. Without considering the potential outcome, the United States stood on the side line when the Muslim Brotherhood replaced decades-old allies in Tunisia and Egypt. Our air force flew ninety percent of the sorties over Libya that resulted in the overthrow of the Gadhafi regime, the eventual murder of our Ambassador, and the current occupation of the US embassy in Tripoli.

Syria is in flames with 150,000 dead in their civil war. That is the equivalent to the death count of 50 World Trade Centers, or 75 Pearl Harbors. The only local group strong enough to confront the Islamic State is the government of Syria, the overthrow of which the US is committed. Iraq is teetering on the edge of a total breakup. In Afghanistan, the Taliban is waiting for America’s withdrawal to retake the country, while the Afghan government cannot choose a successor. Russia has annexed the Crimea and has invaded eastern Ukraine with over 1,000 troops. There is shooting on the cease fire line between Armenia and Azerbaijan. China is making territorial claims in the South China Sea that puts it in conflict with American allies. An ebola outbreak in Africa has infected 3,000 people, killing half. The World Health Organization says the world response to the illness has been inadequate, and the epidemic could spread. Boko Haram is seizing territory in northern Nigeria.

American policy is adrift. The United States remains the sole superpower in the world, with more military and economic might than any other country. For some reason, however, the White House is reacting to events instead of taking charge of them.

The creation of a national security strategy is a simple process to explain, and a difficult process to implement. One must identify American interests in the area. If there are no interests, the strategy should dictate that the United States steer clear. If there are interests, however, the next step is to identify at what point America will employ its levers of national power: military, political, economic, and ideological. The government needs to be clear on the ends, ways and means to be employed to safeguard the U.S.’s interests. They must determine that implementation of that strategy has an acceptable cost, and that the plan is sufficiently robust that it will actually achieve US objectives. The Obama administration published a strategy in 2010. It is time for another, one that the White House can use to protect our interests.

James J. Coyle is the Director of Global Education at Chapman University, and the executive director of the Caspian Research Institute, an online think tank.

Q&A with energy watcher James Coyle

Published in the Orange County Register on April 4, 2013. To access the original article, click here.

Q: What factors are causing high gas prices worldwide?

A: First, there's the ever-increasing need for fuel in China and, to a lesser extent, India. These countries push up demand. In China, they're putting 70,000 new cars on the road every day. Those aren't replacement cars; that's a net increase of vehicles every day. And when you combine that with declines in production from Libya, Syria and Iraq and sanctions on petroleum exports from Iran, you have a recipe for high prices.

Q: So when will we get relief at the pump?

A: I hate to be pessimistic, but as long as demand for oil continues to grow worldwide, we can anticipate high prices. While prices in March moved down slightly because of seasonal fluctuations, the long-term trends predict prices remaining around $4 per gallon.

Q: What needs to happen for gas to become more affordable?

A: The usual answer is drill, baby, drill – but the domestic amount of traditionally-recoverable oil that is suitable for production as gasoline offers just a short-term solution. We're talking about unrecovered deposits in the Arctic National Wildlife Refuge in Alaska, off the coast of California and some other places. They could provide relief for 10 years, maybe 20. Recent advances in the recovery of oil from shale extend the timeline out to 50 years, but at a high environmental cost.

In the short term, any increase in supply, regardless of where we drill, will drop the prices. There really is no such thing as a domestic or world market. That's a fallacy; it's all one market. So we can increase tar sands production in Canada, and all that will do is produce enough oil so that China can add another 70,000 cars to the road.

Q: Taking a longer view, are there opportunities for improvement?

A: There are a couple of possibilities that provide some hope. One is biofuels. Researchers are really starting to experiment with the growth of algae and other things that could be burned for energy – not to put gas in your tank but to generate electricity so oil can be freed up to use for gasoline.

Also, we are witnessing a revolution in the production of petroleum and natural gas from shale oil. Ten years ago, the question was "How long before we run out?" It was a scary possibility. Then, in 2002, a new technique was established to unleash energy from shale through fracking. Now, for the first time since the 1960s, the U.S. is exporting energy. This is the most viable source of hope, because other technologies are just too immature. It is, however, a two-edged sword: the sudden availability of cheaper oil and gas from fracking is kicking the bottom out of alternative energy technologies.

Q: Won't conservation help?

A: Yes, it becomes clear that a big part of the answer is conservation, which doesn't have to mean people riding everywhere on bicycles. It can mean things as simple as checking your tires. If everyone in the U.S. kept their tires properly inflated, we would see a 5 percent reduction in the use of gasoline. That might not sound like a lot, but we consume 20 million barrels of oil a day. Five percent would equate to an extra million barrels of oil daily.

China Challenges the West

James J. Coyle: China challenges the WestBy JAMES J. COYLE / For the Register

Published: Dec. 30, 2013 Updated: 2:44 p.m.

PARESH NATH / CAGLE CARTOONS

On Dec. 5, the guided missile cruiser USS Cowpens was in the South China Sea, observing the maiden voyage of the new Chinese aircraft carrier, the Liaoning. It received a radio message from the Chinese fleet advising them that they had broached an inner defense perimeter surrounding the carrier and was ordered to leave the area. The American skipper replied he had a right to be in the area, as the ship was in international waters.

Suddenly, a Chinese naval vessel accompanying the Liaoning crossed the bow of the Cowpens, within 200 yards of the American naval vessel. The Chinese were apparently trying to force the Cowpens to stop dead in the water, to what ends no one is certain. To avoid a collision between the two ships, the American captain had to make emergency maneuvers. The Americans then broke off from the Chinese fleet. Score one for China.

It was not the first military confrontation. In 2001, a Chinese fighter jet collided with an American EP-3 reconnaissance plane. In March 2009, another U.S. warship, the Impeccable, was forced by five Chinese ships to make emergency maneuvers to avoid another collision.

The “inner defense perimeter” was a Chinese unilateral declaration of sovereignty over the South China Sea. Perhaps even more dangerous are Chinese unilateral declarations in the East China Sea, where China has laid claim to an island group that has been a part of Japan for the past century. It also has laid claim and seized a shoal claimed by the Philippines and a reef claimed by South Korea.

To boost its claims, the Chinese last month declared an air defense identification zone, or ADIF, over these troubled waters. All aircraft flying in the area must declare themselves to Chinese authorities. The U.S. military has ignored the ADIF, but the Obama administration has counseled American civilian aircraft to abide by the rules. Chinese Defense Ministry spokesman Yang Yujun advised this would not be the only ADIF China would create.

The United States takes these claims of sovereignty seriously. In the case of the island dispute between China and Japan, the U.S. has stated that these islands are covered by the U.S.-Japanese defense treaty which states any attack on Japanese territory is considered a threat to the peace and security of both countries. The U.S. has similar pacts with the Philippines and South Korea. U.S. Secretary of State John Kerry traveled to Manila the week before Christmas, condemned China’s unilateral actions, and pledged $40 million to strengthen Manila’s sea defense capabilities.

It is only natural for countries that are growing in strength to flex their military muscles. At issue, however, is the possibility on either side of a miscalculation or mistake. The results could be catastrophic as two nuclear-armed countries faced off against each other. This is something the United States and the Soviet Union avoided throughout the Cold War.

China claimed that other countries need not fear its increase in power, arguing that it was not like great powers in the past. China said it has no military or territorial ambitions. Hu Jintao’s “peaceful rise” has been replaced, however, as China begins acting like a normal great power.

James J. Coyle is a professor and the director of Global Education at Chapman University and chair of the Eurasian Committee of the Pacific Council on International Policy.

China--The New Balancer

In 1991, Zbigniew Brzezinski described Central Asia and the Caucasus as "The Grand Chessboard."  He concentrated on the competition between Russia and the West for control of Mackinder's World Island.  Brzezinski wrote in the belief the United States was the world's sole superpower.

Since then, America has been bloodied in the wars of Iraq and Afghanistan.  A country that Brzezinski considered to be on the periphery, China, is assuming a larger role on the world stage.  The chess match continues, but the Russian Federation has a new opponent:  the People's Republic of China.  "China is likely to overtake the United States (as an oil importer), and Russia has to stake its claim in China," said Raiffeisenbank analyst Andrey Polishchuck.  The head of Russian studies at the China Institute of Contemporary International Relations, Feng Yujun, concurred:  "It has become very important for Russia to expedite entering the Asia-Pacific, especially the Chinese market.  It risks losing more opportunities if it keeps dragging its feet."

The record is pretty clear that it is China, and not Russia, that is in the driver's seat on energy deals.  Rosneft is scrambling to fulfill crude oil contracts with China, while reducing forecasts for production from the Vankor field in East Siberia.  As a result, Russia might have to reduce it's delivery of crude to Europe. The company emailed Reuters that "Rosneft's production plans will without doubt ensure that oil supply commitments are met...In the event of possible deviations, existing agreements and the most profitable supply routes will be prioritized."

Rosneft is also granting the China National Petroleum Corporation (CNPC) an equity stake over one of its oil fields.  Rosneft would maintain control of the project (51% ownership) but China will receive 49% in return for its willingness to help develop the field.  The deposit, the Srednebotuobinsk field, is close to the Eastern Siberia-Pacific Ocean (ESPO) pipeline which delivers crude oil to Daqing, China.  Rosneft has a similar deal with the Chinese company Sinopec, to produce oil in the Republic of Udmurtia.

At the same time, Russia has been trying to negotiate for two years a contract to sell natural gas to China, and deliver it via pipeline.  These efforts have been in vain, despite numerous statements from the highest authorities that a deal was imminent.  Despite the Chinese need for energy to fuel its economic machine, it refuses to accept the Russian price for the gas.  According to the Brookings Institute's Erica Downs, "The Russians probably need this more desperately than the Chinese." Fyodor Lukyanov, head of the Moscow think tank, the Council on Foreign and Defense Policy, believes that a gas deal would be a "major breakthrough" for Russia, but the economics of the proposal would scuttle it.  "China...won't agree to major concessions just to improve its strategic partnership with Russia."

This follows on the heals of Chinese president's Xi Jinping's recent visit to Central Asia. Xi signed an agreement in Turkmenistan to double gas exports to China, cut the ribbon on the Galkynysh gas field (the world's second largest), and pledged $8 billion to build a pipeline from the field to China.  In Kazakhstan, Xi signed $30 billion in deals that included the CNPC purchase of 8% of the Kashagan oil fields, agreed to double the size of the pipeline from Kazakhstan to China, and agreed to build a new refinery.  In Uzbekistan he signed $15 billion in purchases of oil, gas and gold; and in Kyrgyzstan he agreed to a $3 billion deal to construct another pipeline.  In Tajikistan, he signed another $3 billion pipeline deal, which resulted in Gazprom cancelling its own pipeline project to that country.

Alexander Rahr, the research director of the German-Russian Forum, believes that Russian President Vladimir Putin is allowing China to increase its Central Asian presence, so that Russia can concentrate on its Western flank.  ""I think this was a firm choice, a difficult choice, but it was made.  He cannot afford to have geopolitical battles with NATO and the West on the one hand and, parallel to that, battles with China for influence in Central Asia."  Rahr believes Russia is using energy to keep Belarus, Ukraine and Modova aligned with Moscow instead of Brussels.

As China moves deeper into Central Asia, it is forcing Russia out--as the Tajikistan pipeline incident demonstrates.  It is locking up energy supplies that Russia was previously selling to Europe, is obtaining equity interest in Russian energy fields, and forcing Russia to divert supplies from European buyers.  China is telling Russia what to do, and not the other way around.

Transneft-Rosneft Kiss and Make Up

The summer battle between two energy barons in Vladimir Putin's inner circle has been resolved.  On October 11, 2013 Rosneft chairman Igor Sechin and Transneft chairman Nikolay Tokarev reached agreement on financing the further expansion to China of the Eastern Siberia-Pacific Ocean (ESPO) oil pipeline.

The spat began in anticipation of the June 2013 signing of a contract between Rosneft and the China National Petroleum Corporation (CNPC).  That contract obliges Rosneft to deliver an additional 365 million tons of oil over the next 25 years.  This is an increase over the previous contract Rosneft signed to supply 15 million tons annually for the next 20 years.

With negotiations underway for this landmark agreement, Rosneft's Sechin began lobbying for the expansion of the ESPO pipeline spur to China.  Transneft's Tokarev would have none of it.  In a rare public display of disagreement within Putin's siloviki, the Transneft chair identified the source of the conflict:  money.  "Who will pay to expand the pipeline spur to China?" he asked in May 2013.  "Transneft isn't just a service company for Rosneft."

Despite Tokarev's objections, the contract was signed at the International Economic Forum in Saint Petersburg.  With the question of pipeline financing unresolved, Transneft upped the ante by announcing they would stop pumping Rosneft oil on July 28 because at that point Transneft would have fulfilled its previous contract with the state-owned oil company.  Sechin was unperturbed.  "We are in contact and interact with Transneft's CEO Nikolai Tokarev.  There was no conflict.  Obviously, during commercial work the companies may have different positions.  But this is not a conflict but a regular negotiations process."

Sechin's position was that Rosneft would pay an "economically justified tariff", but he did not believe he should finance the expansion of Transneft's network.  Igor Demin, spokesman for Transneft, disagreed.  He said that the pipeline project would be solely for the benefit of one oil company, Rosneft.  If Transneft had to find financing for the project, the entire Russian oil industry would have to pay for it.

The Russian government remained neutral.  Deputy Energy Minister Kirill Molodtsov basically said he didn't care who paid for the pipeline, as long as it remained profitable.  "Profitability is the top priority.  That applies both to Rosneft and Transneft.  This is what we are looking at when we consider the investment projects proposed by Transneft and Rosneft."

In August, the two oligarchs tried to use their ultimate trump card, their connections with President Putin.  Sechin began by writing an eight page letter accusing Transneft of charging too much to transport oil.  "The current system of Transneft's transport tariff system is not transparent and does not suggest reduced tariffs for oil companies, which invest in this region and supply the Far East region with oil products."  Tokarev responded with an analysis that Transneft tariff's had not contributed to a rise in gasoline prices.

Transneft then accused Rosneft of signing delivery contracts it could not fulfill.  Speaking to a ministerial meeting in September 2013, Transneft vice president Alexei Sapsai warned that Rosneft was in danger of being short at least 3.9 tons for its eastern routes.  If a planned Rosneft petrochemical complex (VNHK) comes on line, the shortage would stand at 15.9 million tons.  Transneft even decided to withdraw their role in the refinery because of the disagreement on tariffs.

Despite the fireworks, the two sides reached an agreement on October 11, 2013.  According to a statement on Rosneft's website, "Rosneft President and Chairman of the Management Board Igor Sechin and Transneft President Nikolai Tokarev have signed a number of agreements in fulfillment of the strategic plans on mutually beneficial terms and based on principles of co-financing to increase oil supplies volumes to China and to the Rosneft's Tuapse refinery in the Krasnodar region.  The package of agreements on oil supplies increase to China envisages commitments by the Parties to finance and implement the activities aimed at the capacity expansion of the Skovorodino-Mohe oil pipeline, as well as to increase respectively the volumes of crude shipment in this direction.  The pipeline capacity is expected to reach 20 million tons of crude per year beginning on 1 January 2015 and 30 million tons per year beginning 1 January 2018.  It means that 15 million tons per year will be supplied to China from 2018 to 2037 in addition to existing volumes."

According to Vedomosti, Transneft will finance the expansion of the pipeline, while Rosneft will pay back the investment through a special long-term tariff to be determined by the Federal Tariff Service.  This is a clear victory for Igor Sechin, who had made the same proposal in July.  In addition, it appears that Rosneft will only have to pay for a small portion of the ESPO expansion.  The Russian Ministry of Energy estimates that the total cost for the development of ESPO will be $1.46 billion (Transneft puts the figure around $2.29 billion), but Rosneft is only financing the Skovorodino-Mohe section, whose cost is an estimated $300 million.

The world's largest oil company has trumped Transneft, a company that is led by Putin's former KGB boss.

No Russian Gas for China Yet

In March 2013, Gazprom CEOAlexei Miller stated that an agreement with China on the pipeline gas deal that they have been negotiating since 2004 would be signed by June 2013.  "The parties plan to sign legally binding principal terms and conditions of the contract in June this year and sign the long-term contract by the end of the year," he said.  With that deadline now on the ash heap of history, Miller is now hopeful for a September contract.  "I think it can be said in September we could achieve the signing of the basic terms of the contract."

Gazprom's Export CEO Alexander Medvedev was not as optimistic.  He said Miller's statement was a hope, not a reality.  He said that Miller was engaged in wishful thinking, and that thinking made it so.  The issue has not changed over the decade:  Gazprom wants to charge China using a price linked to the European market; China has never accepted this, arguing they are a developing country that cannot afford such prices. China has also claimed that the transit distance between Russian fields and China is less than between the wells and Europe; accordingly, prices should be less.

Despite these issues, Russian President Vladimir Putin remains optimistic about the Asian market.  "We  are thinking about entering the promising market in the Asia-Pacific region.  We should find our niche here; we have every chance of doing that," he said.  "The Asia-Pacific region is developing rapidly.  Its consumption is growing rapidly, and Russia can play a prominent role."  Putin's remarks may be fulfilled with the newly signed Rosneft contract to deliver petroleum to China, but Gazprom's $68 billion pipeline project remains mired in the inability of the negotiators to move toward an accommodation.

Russia and China Sign Major Petroleum Deal

On 20 June 2013, Russia and China signed a deal worth $270 billion dollars.  Rosneft agreed to double its sale of petroleum to China by 300,000 bpd over the next 25 years (5 years prolongable,)  from 15 million tons to 30 million tons per year.  The agreement was signed by Rosneft chief executive Igor Sechin and China National Petroleum Corporation (CNPC) chief Zhou Jiping in the presence of Russian president Vladimir Putin.

An important part of the deal is a $60-$70 billion prepayment for the oil, alluded to by Putin at the announcement of the contract.  JP Morgan analysts said, "If confirmed, this would be a transformational event for the company's balance sheet:  Rosneft could even potentially be able to show a net cash position, though working capital would be negative.  The prepayment could minimize financing risks for the leveraged state-controlled oil company."

The increased petroleum flows began even before the contract signing.  Reuters reported on June 18 that Russia was increasing its oil supplies to China by 13 percent in July-September over the previous three month period.  With this increase, Asia as a whole was importing 17% of Russian oil exports.  According to Valery Nesterov, analyst from Sberbank CIB, "Russia has been losing its interest in Europe where oil consumption is stagnant.  It's looking increasingly to the East."

Then came the June 20 deal, in which China acquired the rights to buy from the world's largest gas station:  Russia.  According to Liao Na, Vice President of the energy consulting company, ICIS C1 Energy, the timing was right.  "The seller and the buyer both have strong willingness to reach the deal provided the price was comfortable for each of them.  It is good timing, considering current international oil prices."

It was originally announced that fuel for the deal was to come from East Siberia fields.   In the annual meeting with Rosneft shareholders, Sechin named two fields as the main source of the oil, Vankor and Verkhnechonsk, that are nearing peak output.

In fact, the oil is not coming from East Siberia, but is being diverted from fields that service the European market.  Igor Katsal, Transneft deputy vice president, told reporters, "We supplied those 800,000 mt to the west and now will redirect them to the east.  They won't be replaced in the western direction."  Transneft confirmed that at least half of the redirected crude will be produced at Samotlor in West Siberia.  Deputy Energy Minister Kirill Molodtsov confirmed Russia planned to increase oil exports from the Pacific.  "The balance between West and East will change," he told reporters.

The reason for the diversion is that Russia has promised large quantities to Asia.  In addition to the current flows of 750,000 bpd, Russia promises to send another 9.1 million mt per year to China after a CNPC-Rosneft joint refinery is completed in Tianjin.  These changes are taking place at a time that Russian domestic consumption of crude is also rising.

How the oil will be delivered physically is still undecided.  Transneft spokesman Igor Demin said that there has been no change in its contract with Rosneft.  As a result, although Transneft has adjusted its transit schedule to accommodate the larger oil flows through the East Siberia-Pacific Ocean (ESPO) pipeline, Demin said that shipments might soon be suspended because it will have fulfilled its obligations under existing contracts.

The eastern "black gold" rush is encouraging others to enter into the field.  Lukoil CEO Vagit Alekperov confirmed that they are increasing exploration in East Siberia.  Alexei Kokin, an oil and gas analyst at UralSib Financial Corporation, wrote, "Other Russian companies' experience probably convinced Lukoil that East Siberian projects can be attractive.  As a late entrant, Lukoil will be able to learn from the pioneers' mistakes and be more efficient."

Russian Energy Flows Move East

In a move with major geopolitical ramifications, Russia is diverting increasing amounts of energy from the European market to the Asian.  Economically, it makes sense that Russia would want to be less dependent on the stagnating European economies, and the growing economies of Asia are a strong alternative.  "Russia has been losing its interest in Europe where oil consumption is stagnant.  It's looking increasingly to the East," said energy analyst Valery Nesterov.

The East Siberia-Pacific Ocean (ESPO) pipeline, originally opened with a branch line to Daqing (15 million tons delivered in 2012) has now expanded.  In January 2013 ESPO 2 opened to the Pacific Ocean.  ESPO oil flows are scheduled to increase from 30 million tons in 2012 to 80 million tons.   Bloomsberg estimates that in February 2013, Russia sent 1.1 million tons (22 percent of total oil exports)  in an easterly direction, up from 18 percent in October 2012.  By 2015, when ESPO reaches full capacity, Russia is scheduled to send 25 percent of its crude exports to eastern markets.

In addition to ESPO, which traverses only Russian territory, there is the possibility that Russia could sell additional oil to China via Kazakhstan.  Kazakh Energy Minister Sauat Mynbayev reported he was in negotiation with Russia to begin the sales as early as 2014.  The oil would reach China via the Kazakh Atasu-Alashankou pipeline. (Russia shipped oil to China through this pipeline until 2010.)   Kazakhstan would deliver 7 million tons of oil to China, and Russia would give Kazakhstan an equal amount in a "swap operation."  Such a move would be opposed by the Russian pipeline operator Transneft, who believes they would lose $1.5 billion in transshipment revenue.  Transneft CEO Nikolay Tokarev opined that the deliveries could proceed if the the lost revenue was compensated in the budget.

In March 2013, Rosneft and the China National Petroleum Corporation (CNPC) signed an agreement to increase oil exports to China.  In return for the agreement, China reportedly agreed to make an advance payment of $8-10 billion.  In addition, China Development Bank agreed to extend an additional credit line of $2 billion to Rosneft for the duration of the contract.  Russian Energy Minister Aleksandr Novak implied the delivery would be via the Kazakh swap mechanism.  No date was given for the signing of the contract.

As for natural gas, the situation is more complicated.  Russia already has agreements to send China 68 billion cubic meters (bcm) annually.  Deliveries have not begun, however, because of an inability to agree on price.  In March 2013, Gazprom and CNPC signed another memorandum of understanding in which the Russian company agreed to supply 38 bcm per year for 30 years, beginning in 2018. Price remains an issue.  Gazprom chairman of the board Viktor Zubkov was optimistic that an agreement could be reached by June, and hoped the price could be pegged to the cost of oil.  He admitted, however, that "the Chinese side probably believed there were other parameters that prices could be pegged to."  

Russia China Gas Talks Stymied

Russia and China ended 2012 no closer to a gas deal than when they began it.  The two countries continue to squabble over the construction of two natural gas pipelines designed to bring 68 billion cubic meters (bcm)    
to the Middle Kingdom.  The pipelines have been on the drawing boards for over 3 years, and Russian President Vladimir Putin believes that Eastern markets will be a focal point of Russian natural gas development.  Talks fell apart in 2011, however, when China increased its purchases from Turkmenistan.

In late April 2012, Chinese officials signaled optimism that the talks might resume.  Liu Tienan, head of China's National Energy Administration, told reporters China had  a new model for gas cooperation.  He did not specify what the new model was.  "Now all that remains is the question of prices," he said.  Tienan said Chinese Vice Premier Li Keqiang had presented Moscow with "a completely new model of development of cooperation...and received a positive assessment from the Russian side."  Tienan said both sides were interested in having private corporations from the two countries begin consultations.  Jiang Jiemin, the chairman of China National Petroleum Corporation, sounded upbeat as he explained that most of the key points to a gas deal had been agreed upon.  Putin also sounded conciliatory, "We are looking for compromises and are finding them," he said.  In an op-ed piece he wrote in June for a Chinese newspaper, Putin declared cooperation to be a Russian strategic goal:  "The energy-sector dialogue between our two countries also has a strategic dimension.  Our joint projects have a big impact in shaping the global energy market's entire configuration.  They offer China more reliable and diversified energy supplies for its domestic needs, and offer Russia the chance to open up new export routes to the fast-growing Asia-Pacific region."

According to Li Lifan of the Shanghai Academy of Social Sciences, however, when Germany renounced nuclear energy following the Japanese nuclear accident at Fukushima, Russia believed European demand for its hydrocarbons would increase.  The Russians refused to make compromises on the price question with the Chinese because Russia felt no need.

In June, Gazprom produced a new idea of its own: swapping production fields.  Russian Energy Minister Alexander Novak said, "Gazprom offered to let the Chinese participate in development of fields on Russian territory on the condition that Gazprom could participate in the development of fields on Chinese territory."  The asset swaps would be factored into the price of Russian gas shipments.  Gazprom CEO Alexander Medvedev said chances for an agreement in 2012 were very good.  "The talks are going on uneasily, but we have an understanding," he said.

In September 2012, Novak again reported progress.  He said Russia was requesting China pay in advance for natural gas from the proposed $14 billion Altai pipeline, up to 40% of the construction costs.  Matthew Hulbert commented that Russia remained unwilling to offer the price discounts the Chinese wanted.  Russia wanted $350-$400 per thousand cubic meters (tcm), while China wants to pay only $200-$250 tcm.

Putin ended the gas year making the same call for Eastern exports that he did at the beginning.  "The priorities should be supplies to the domestic market, our own economy and our enterprises, as well as diversification of markets to account for the prospective Asian segment and means of delivery," he said.

With cooperation between the two countries  uncertain, in September 2011 China signed an agreement with Kazakhstan increasing the capacity of the China Kazakh pipeline by 80% to 25 bcm.  They also signed an agreement to double pipeline capacity with Turkmenistan.  The Turkmen agreement will bring an additional 60 bcm to China by 2015, almost the same amount as the proposed Russian pipelines.  Beijing is also awaiting the completion of the trans-Burma pipeline for another 14 bcm.  Even Uzbekistan's tiny gas production is headed for China.  In May 2012, Tulagan Zhurayev, head of Uzbektransgas, said they were ready to start shipping gas immediately, as soon as some legal issues were settled.  "We haven't started shipping gas yet," he said.  "We pan this year to supply between 2 bcm and 4 bcm.  We have the gas and everything is ready."  The Uzbeks began their gas flows in August.  In short, while the talks stall Russia is losing market share to its competition.

Russia Accelerates Oil Sales to the East

With the December 2012 opening of the second leg of the East Siberia-Pacific Ocean (ESPO) pipeline, analysts have begun to focus on Russia's turn to the Pacific Basin--and what it means to Europe.  Russia's interest in its oriental frontier is not new, however;  it was the whole purpose behind building ESPO in the first place.  "We will have a future of accelerated growth when we have two strong legs:  not just one in Europe, but one in Europe and the other in Asia," said Igor Shuvalov, the Russian first deputy prime minister for economic affairs.  Then-Prime Minister Vladimir Putin in August 2010 said the project created "notable competition" to European deliveries.

The first leg of ESPO began shipping East Siberian oil to the Chinese city of Daqing in January 2011, but the last leg of the Russian pipeline--to the port city of Kozmino on the Pacific Ocean--was delayed.  Oil shipments to the Pacific had to complete the last leg of their journey aboard railroad cars.  In January 2011, however, Russia began sending ESPO oil to the United States when the Trans Alaskan pipeline was shut down after developing a leak.  To make up the shortfall of product to their West Coast refineries, BP contracted the tanker Nelga Spirit to take 100,000 metric tons (700,000 barrels) of oil to the United States.

With the opening of ESPO's Daqing connection, the transfer of oil sales to the East was felt almost immediately in Russia's major oil port, Novorossiysk.  Chris Weafer, chief strategist at UralSib Financial Corporation, said "Investors are shy of Novorossiysk stock right now because there is uncertainty over how long the gap between losing oil and picking up other cargos will last.  Jonathan Kollek, vice president of TNK-BP for sales, trading and logistics, said the Black Sea route would probably bear the brunt of falling crude flows as ESPO came on line.  Elena Sakhnova, a transportation analyst at VTB Capital, predicted that oil volumes at the port would probably decline at a rate of between 3 and 6 percent for a couple of years before stabilizing (presumably at the lower level.)

The pipeline has a tremendous capacity.  Oil exports can be increased from the current level of 15 million tons annually, to 50 million tons.  The total estimated capacity of Russian oil exports to the region is 80 million tons, according to Vladimir Feigin, general director of the Institute of Energy and Finances.  The question becomes, from where will the oil come?  Until now, ESPO oil has come primarily from Rosneft's Vankor oil field, but production there is only expected to increase next year from approximately 80,000 metric tons to 90,000 metric tons.  "It would be quite a challenge for Russia to fill the pipeline.  And some of the east Siberian fields have not been performing as expected,"  said UBS oil expert Julius Walker.

Without easy access to sufficient East Siberian oil, Russia is turning to the West Siberian fields that send oil to Europe.  The Moscow Times reports that a first-quarter loading schedule shows that Russia will cut Europe-bound oil supplies, with the biggest decline (20%) expected at the Baltic port of Ust-Luga.  "There is just enough East Siberian for the existing pipeline," said Sberbank analyst Valery Nesterov.  "But expanding this pipeline further would be impossible without West Siberian oil - and that oil is already meant to go west."  Alfa Bank senior analyst Alexander Kornilov added, "Of course, there is a risk of oil-flow cuts to Europe."  The cuts could be based on economics, or on political considerations as remarks from Transneft CEO Nikolai Tokarev demonstrate."We do not owe a single EU country a thing, and we are certainly not obligated to account for ourselves,"  he said.  "If they want to hold a normal proper conversation, they should change their approach to such a dialogue." 

Tokarev outlined who the main customers for the new oil flow would be, and led off the list with the United States.  "The American market will receive 35 percent of Kozmino oil.  Around 30 percent will go to Japan and 28 percent to China.  The rest will go to Singapore, Malaysia and South Korea."

Tokarev's predictions do not take into account the effect of the fracking revolution in the United States.  Oil production in the United States for the week ending 4 January 2013 is up almost 15 percent over the same time a year ago, and the country met 83% of its energy needs in the first 9 months of 2012 from domestic production, according to the Washington Post.  As a result of the increase in US production, the International Energy Agency is predicting that the US could surpass Saudi Arabia as the world's leading oil producer by 2020.  Should Russia divert its oil shipments to the Pacific, it might find its markets have been flooded already with cheap, American product.



 

Competing Visions for Turkmen Gas

The legal status of the Caspian Sea continues to divide energy analysts' views on the future of Turkmenistan's gas production.  A senior Turkmen official who refused to be identified by name said the country plans to begin production next year in the Galkynysh (South Iolotan) field, the second largest gas field in the world.  "Right now, three gas-processing plants are being built, and two of them are certain to be ready in January or February," he said.  Such plans again raises the question as to who will buy the oil.  The Turkmen official said the government was holding out for some long-term agreements.  "We would like to receive guarantees on transit and purchase (volumes).  We need to come to a principle agreement on this."

In the West, the United States, Turkey and the European Union appear united that the energy should flow toward the Atlantic.  Patricia Flor, EU representative for Central Asia, urged Turkmenistan "to reach agreement with EU energy companies on a commercial contract."  Such contracts would require the construction of the Trans-Caspian Pipeline (TCP).  Turkey has thrown its support solidly behind this.  On September 3, 2012, Turkish Energy and Natural Resources Minister Taner Yildiz announced that Turkey intended to import and transport Turkmenistan's gas through the proposed TCP and TANAP pipelines.  Turkmenistan President Berdymuhamedov repeated his country's interest in selling to Europe through the TCP.

Russia, however, continues to oppose construction of the TCP.  According to the Russian envoy to the European Union, Vladimir Chizhov, in 2007 the presidents of the five littoral states of the Caspian Sea adopted a binding resolution at the Second Caspian Summit that all major decisions dealing with that body of water would require the consensus of all. The United States disagrees.  Lynne Tracy, deputy assistant secretary of state for South and Central Asian Affairs, said that if Turkmenistan and Azerbaijan agree on a pipeline that crosses only their territorial waters, "no other country has veto power over that decision."

Looking at the controversy and other factors, the energy consultants Wood Mackenzie conclude that Turkmen energy will go to China instead of Europe.  In a Reuters report, WoodMac's senior gas supply analyst is quoted as saying "The practicalities of the project are challenging and without any significant progress in the last decade, the proposed pipeline has been overtaken by competing projects....We forecast that China will have around 50 bcm of gas demand in 2020 that needs to be satisfied by additional imports, and Central Asan gas could play a key role in meeting this demand."

China has another advantage that might prevent the TCP from being constructed:  it finances pipelines headed East and there does not appear to be a white knight on the TCP horizon.

Potential Backers Lose Interest in TAPI

Despite support from both the United States and the Asian Development Bank, potential investors are backing away from the proposed Turkmenistan-Afghanistan-Pakistan-India (TAPI) natural gas pipeline.  This proposal has been beset with concerns over security of the pipeline route, which passes through some of the most violent prone provinces in Afghanistan.

In the latest development, China has expressed new interest in Turkmen gas.  First, Chinese President Hu Jintao has proposed a new pipeline route that would bring Turkmen gas to China via Afghanistan.  The benefit of this latest proposal is that the pipeline route would traverse a safer route in Northern Afghanistan.  Second, China also signed in May 2012 an agreement with Turkmenistan to increase deliveries through the East-West Gas Pipeline from 30 bcm  per year to 65 bcm.  This pipeline does not pass through Afghanistan, has no security isues, and has been relatively trouble free since it opened in 2009.  Finally, China has assured Turkmenistan that its demand for natural gas will constantly increase over the next five years.  As a result, Turkmenistan's enthusiasm has "softened" for TAPI, according to Pakistani correspondent Iqrar Haroon.

The Russian National Energy Institute has recommended the Russian government should avoid investing in TAPI because of security concerns, and questions over the viability of the project.  According to the Indian Institute for Defence Studies and Analyses, the proposed increases in Chinese purchases of Turkmen gas will have a negative impact on Russia.  Turkmenistan offers lower-priced gas to China, bringing downward pressure on Russian gas prices.  Russia and China have been in talks since at least June 2009 to import 68 bcm of gas per year, but have not been able to agree on a price.

China Russia Energy Cooperation Moving Slowly

You would think that the most natural thing in the world would be for a large energy producer to partner with a large energy consumer, but in the case of China and Russia logic does not always prevail. The Washington Post quotes a Western energy executive who said, "They look like the perfect partners, but this is a marriage made in hell." He added the two sides were so afraid of being outdone by the other that negotiations tend toward all-or-nothing combat. The issue, whether discussing gas or crude oil, is the relationship between price and transportation distance.

In the case of oil, in October 2008 Russia and China signed an agreement in which the China Development Bank lent Transneft the funds to build an extension of the East Siberia-Pacific Ocean (ESPO) so that Russian crude could be delivered to the Chinese city of Daqing. The loan was to be repaid by supplying China with 300,000 barrels per day of crude for twenty years. Everything appeared on track, and on December 31, 2010, the first Russian oil crossed the Chinese border.

In April, Transneft reported that it was losing $20 million a month in the oil deliveries, because China had unilaterally decided that they were paying too much and reduced payments. Russia threatened to take the Chinese National Petroleum Corporation (CNPC) to the London Arbitration Court. China wanted a discount, because the oil they were purchasing traveled less than oil destined for Japan. according to Transneft spokesman Igor Dyomin, "There is no price difference for oil companies as to where they enter ESPO and where they exit...Russia is long out of socialism--we want fair market pricing."

Chinese Foreign Ministry spokesman Hong Lei was sanguine about the dispute. Reuters reported his comments that, "As for some concrete problems encountered during cooperation, we believe both sides can fully resolve this in a positive way via friendly negotiations and on a mutually beneficial, win-win basis."

Some progress was made in late May 2011, when China paid about three-fourths of the money the Russians claimed they were owed. Shortly thereafter, China resumed discounting its payments. After talks in early June, a Russian Energy Ministry spokesman said that the pricing formula would remain unchanged. "The price formula will be kept unchanged, we have agreed on that and China is ready to make payments according to it," quoted RIA Novosti. The Russians were overly optimistic, however. "They actually went back to the level of negotations which we had prior to the signing of the contract," Pravda quoted Transneft officials.

A Russian source stated anonymously that if the Chinese did not pay for the oil in full, that the dispute would go to the arbitration court, and that Transneft was prepared to repay its 20 year loan ahead of schedule, according to oilprice.com. With the loan repaid, Transneft could cease oil deliveries. China then moved the dispute from the state-owned company level, to the governmental level.

Russia's Deputy Prime Minister, Igor Sechin, tried to calm the situation. He said he did not see any problems that could not be solved, and that not all opportunities had been exhausted, according to RIA Novosti. Finally, in October, Premiers Wen Jia Bao and Vladimir Putin jointly announced a breakthrough. "The two countries agreed on crude oil prices and decided to actively push forward cooperation on oil and gas," China Daily quoted Wen. No details of the agreement were released but anonymous sources told oilprice.com that Russia, who had claimed China was underpaying by $3 per barrel, had agreed to a $1.50 discount.

At least a compromise had been reached. Natural gas is a different story. Currently, China consumes about 150 billion cubic meters (bcm) of natural gas per annum, approximately 4% of its energy mix. This amount is expected to double by 2020, according to a report in the People's Daily. Russia and China signed an agreement in 2006 to build two natural gas pipelines. Russia would then send 70 billion cubic meters annually to China. In 2011, despite numerous positive remarks by both Chinese and Russian officials, there is no pipeline construction.

Denis Borisov, an oil analyst at the Bank of Moscow, believes that Russia badly needs a gas deal with China, to diversity its exports away from saturated European gas markets. "Talks may last long but the gas deal won't be sacrificed..I think gas cooperation is a top priority for Russia," he told Reuters. This optimism was echoed by a Chinese source close to the Chinese-Russian talks,. "Our positions have gotten closer," he said about the possibility of a Chinese loan to build the pipeline.

In April, Chinese President Hu Jintao met with Dmitry Medvedev in the Chinese resort town of Sanya. The leaders announced they would pursue cooperation on major energy projects, such as the west natural gas pipeline from West Siberia to China, according to the Xinhua news agency. Despite the positive pronouncements, Interfax China reported that Gazprom and CNPC were involved in tough negotiations over price that did not appear to be progressing.

Everything looked better in May. Russian Deputy Prime Minister Igor Sechin reported that, after many years of fruitless negotiations, Russia and China had coordinated the key terms of a long-term gas contract. "We are considering two gas supply routes for the next 30 years. The western route will provide China with 30 bcm of gas, the eastern one with 38 billion,' he said. He also said there would be no problem with financing, according to the Voice of Russia. Sechin cautioned, however, that the two sides had not reached a final agreement on price--leaving that detail to Gazprom and CNPC, according to Russiaprofile.org. Chinese Assistant Foreign Minister Cheng Guoping was pleased: "Personally, I'm confident that if progress is smooth, then it's quite likely that in the near future..both sides will achieve a major breakthrough in cooperating over natural gas," he told a news conference. Xing Guangcheng, an expert on Russian studies at the Chinese Academy of Social Sciences, commented, "The deal is not an ordinary project between just two companies. It is a project of bilateral strategic importance, and it needs the determination of the leadership from both sides," according to China Daily.

It was not to be. President Medvedev announced that documents were being finalized, and Premier Hu Juntao said both sides ere willing to push forward, but price remained a stumbling block. "We are not going to sign anything this time," Medvedev concluded the negotiations, according to New Europe. Russian Energy Minister Sergei Shmatko commented, "This is not some simple bazaar deal; we can't hurry on this."

The disagreement was outlined in China Daily. Andrew Neff, an analyst who specializes in Russia and the Commonwealth of Independent States at IHS Global Insight, explained the Russian position: "Gazprom is focused on achieving a price agreement in line with that of its long-term, oil-indexed contracts for pipeline supplies to its European customers." But China disagreed. Pang Changwei, Director of the Institute for International Oil Politics at China University of Petroleum said it was unrealistic to base the price on the European market because the distance between China and Russia was much less than that between Russia and Western Europe. He reasoned that because transportation costs should be lower, so should the price. It was the same Chinese argument that disrupted oil deliveries through ESPO.

Some analysts believe that Russia has no intention to actually build a gas line, and that the lengthy negotiations are a ruse. RusEnergy partner Mikhail Krutikhin opined that clearly no gas agreement would be reached. "Russia is trying to scare Europe with threats of redirecting its gas to China, but China is not ready to pay $220-$230 per 1,000 cubic meters," he said according to Nezavisimaya Gazeta. Robert Cutler cited a Chinese press leak that the two sides were as much as $100 per thousand cubic meters apart on price.

In the end, price differences could be negotiated, but the heart of the matter is a lack of trust between the two sides. "China looks very seductive, but" said former Russian deputy energy minister Vladimir Milov. "there is a deep lack of trust behind the facade," quoted the Washington Post. This lack of trust could be generated by geopolitical rivalry between the two sides, according to analyst Alexandros Petersen. The Chinese officially reject such an analysis as an "inaccurate Western perspective," but Petersen quotes a Sinopec analyst saying, "Our interests and the interests of our government are to see stable governments in the region...The result is soft geopolitical competition between China and Russia. And it is spreading."

All that's left is to see what is more important: access to energy, price or geopolitics.