Power Grab: China’s quest for energy

China finds promise and setbacks in pursuit of Russian energy

Wang Jianwei/Xinhua - Staff members inspect the pipelines and oil storage tanks of China and Russia crude oil pipeline in Mohe in northeast China's Heilongjiang Province last January.

At exactly 48 minutes past midnight on Jan. 1, Russia did something it had never done before: It began pumping oil to China across a 2,600-mile border that once bristled with tanks, troops and nerve-shredding tension.

The oil flowed from eastern Siberia through a newly completed pipeline, the first such link between the world’s largest petroleum producer and its biggest energy consumer — and a symbol of what the two giant neighbors hail as a perfect symmetry of interests.

Graphic

A would-be energy axis between China and Russia
Click Here to View Full Graphic Story

A would-be energy axis between China and Russia

Gallery

More on this Story

“We and the Chinese need each other,” said Nikolai Tokarev, the head of Transneft, a state company responsible for the Russian portion of the pipeline. “They need oil, and we need a market,” added the Russian, a longtime associate of Prime Minister Vladimir Putin.

When it came time to settle accounts for the first deliveries, however, Tokarev got an unpleasant surprise: China, Transneft says, underpaid by more than $100 million. “Naturally, this did not cause delight,” Tokarev said. “We were surprised because there is a contract and this contract has signatures. It should be respected.”

The dispute hasn’t shut down the pipeline, but it has put a spotlight on a curious malaise at the heart of a would-be energy axis between Moscow and Beijing. While the law of supply and demand — as well as a common desire to curb the United States — pushes the two countries together, a long history of mutual distrust, similarly hard-nosed business styles and gnawing fear of dependency keeps them apart.

“They look like the perfect partners, but this is a marriage made in hell,” said a Western energy executive who has worked with both countries. Russia and China, he added, are “so afraid of being outdone” by each other that negotiations tend toward all-or-nothing combat.

‘Deep lack of trust’

The economic imperatives for greater cooperation remain powerful and, predicted a report issued last month by the International Energy Agency, should ultimately prevail, with China’s share of Russia’s total earnings from fossil fuel exports forecast to rise from the current 2 percent to 20 percent in 2035. But economic logic has rarely run in a straight line between Beijing and Moscow.

China desperately needs what Russia has in abundance — oil, natural gas, coal, mighty rivers for hydropower, and nuclear know-how. And Russia, seeking to position itself as an “energy superpower,” has increasingly looked to China to help boost its economic and political clout.

Between 2000 and 2010, China nearly doubled its consumption of oil, and it is on track to overtake the United States as the biggest petroleum importer by the end of the decade.

To feed this demand, and their own bottom line, state-owned energy behemoths such as China National Petroleum Corp., or CNPC, have scrambled for supplies across the Middle East and Africa and closer to home in the disputed waters of the South China Sea.

But perhaps no other country has offered quite as much promise — and frustration — as Russia, which produces more oil than even Saudi Arabia, sits just next door to China and, because of the retreat from democracy under Putin, is often on much the same wavelength as Beijing’s own authoritarian leaders.

Russia’s proven oil reserves are five times as big as those of China, which last year consumed three times as much petroleum as its northern neighbor. Russia also has the world’s biggest supplies of natural gas, a resource that until recently China largely neglected but that is now at the center of its energy policy. China plans to double gas use over the next five years and boost its role much further after that.

“China looks very seductive,” said Vladimir Milov, a former deputy energy minister who took part in early negotiations with Beijing on oil and gas. But, he added, energy cooperation doesn’t depend on “just looking at the map. . . . There is a deep lack of trust behind the facade.”

In the first 10 months of this year, faraway Saudi Arabia sent 21 /2 times as much oil to China as Russia did, while Angola, even farther away, and Iran also supplied much more than Russia, according to Chinese trade statistics. Because of the new Siberian pipeline, Russia has nudged ahead of Oman for fourth place but still accounts for just 7 percent of its voracious neighbor’s total oil imports.

Meanwhile, Russia’s Gazprom, the world’s biggest gas company, has spent a decade haggling with CNPC over a proposed gas pipeline and a mammoth supply deal worth up to $1 trillion. Not only has construction not begun, but the two sides can’t even agree within a thousand miles on where the pipeline would go.

During one negotiating session in Beijing at the Great Hall of the People, Russia’s deputy prime minister and energy czar, Igor Sechin, voiced frustration at the slow pace and suggested that experts from both countries simply be ordered to settle outstanding issues within 48 hours. The leader of the Chinese delegation, according to a Russian who was present, laughed out loud.

Yang Cheng, a former Chinese diplomat in Moscow who is a scholar at Shanghai’s East China Normal University, said Russia and China keep talking past each other. When Moscow first pushed for greater energy cooperation at the start of the 1990s, China “still thought it could supply itself,” and when it later turned to Russia and sought to gain stakes in oil fields, Western companies already had the inside track. Yang said that he remains optimistic in the long run but that each side has to stop “talking about its own stand and neglecting the other.”

Years in the making

The energy sectors in Russia and China are dominated by giant state-owned corporations that pursue profit but are also entangled with security and other government agencies. The former head of CNPC, petroleum engineer Zhou Yongkang, sits on the Communist Party’s Politburo, combining a keen interest in energy with overall responsibility for China’s security agencies.

Russia’s energy firms are studded with former KGB men. Tokarev, the head of Transneft, used to work at the KGB with Putin, according to Milov and Russian energy experts. Tokarev declined to comment on that assertion. Sechin, a former head of state oil company Rosneft, also began his career in what Russians call “the organs.”

Tokarev believes that the firm grip of state companies on Russo-Chinese energy deals “makes things much easier” because private companies “have different criteria and different approaches to business.”

But it was a private Russian oil company, Yukos, that pioneered oil deliveries to China — by rail — and led an early push for a pipeline. Yukos’s China efforts fizzled after the 2003 arrest of its boss, Mikhail Khodorkovsky, who — convicted of corruption and tax evasion — has since been in jail.

In a written reply to questions, Khodorkovsky described the Chinese as “very tough negotiators but scrupulous partners.” In contrast, he said, Russian “state functionaries have demonstrated to China that internal ambitions and bickering are more important to the Russian bureaucracy than reliability in partnership.”

Khodorkovsky said that after he got thrown in jail China executed its contracts with Yukos “to the last possible moment” but then “pragmatism prevailed:” Beijing granted Rosneft, a Kremlin-backed Russian company, a $6 billion loan so that it could acquire Yukos’ prize assets and thus destroy Khodorkovsky’s oil business.

With the pipeline project clouded by Khodorkovsky’s arrest and arguments over its route, Zhang Guobao, the then-head of China’s National Energy Administration, complained in 2006 that the project is “one step forward and two steps back.”

Transneft eventually started work on a revised version of Yukos’s pipeline plan after China came up with a $25 billion loan — and stipulated that the money be repaid with oil by Transneft and Rosneft.

The line to China branched off a much longer pipeline that Transneft was building all the way to the Pacific coast to give Russia access to markets in Japan and elsewhere. Focusing on China alone, Tokarev said, would be “economically risky” because it would make Russia dependent on a single customer.

When Russian oil finally started flowing to China in January, both countries trumpeted a new era of cooperation — and then promptly started feuding over who owed what. Each month since has brought more squabbles over payments, though Transneft says the Chinese are now paying much closer to the agreed price. CNPC, which receives the Russian oil, declined to comment.

Doing business with Europe, Tokarev said, is “easier and simpler. . . . We must get used to the Chinese, just as we and the Europeans got used to each other over many years.”

When Russia finished building its portion of the China oil pipeline in August 2010, Putin traveled to Skovorodino, near the Chinese border in eastern Siberia, for a celebration, also attended by Tokarev and Sechin. Also there was Zhang, the Chinese energy official who had been prodding Russia for years to get the pipeline built.

“This project is important for our Chinese friends and for Russia,” Putin said. He thanked Russian workers for their “really tremendous achievement” and remarked that China had yet to finish construction of its own — much longer — pipeline to the border with Russia. “Our Chinese friends need to do a little more work,” Putin said.

Staff researcher Wang Juan in Beijing contributed to this report.

 
Read what others are saying