OREANDA-NEWS. August 08, 2014. As the Ukraine crisis continues, Russia has been pressed to diversify its trade partners and expand energy exports to China. These actions demonstrate the options of Russia while feeding the insatiable energy appetite of China.

This is mostly demonstrated notably in the 30-year, USD400 billion deal to deliver natural gas from Russia to China on 21 May 2014 (though this deal may not be as big as Russia claims). The Sino-Russian deal also eliminated LNG import-tax from Russian sources.

Due to environmental concerns caused by coal fired energy and projected economic growth, China is aiming to raise its natural gas consumption from 170 bcm (Billion Cubic Meters) in 2013 to 420 bcm in 2020. Thus, the situation between the producer states is not a zero-sum game. Nevertheless, Chinese market power is demonstrated through the current pricing of energy from Central Asia and Russia.

In addition to showing the options extant for Russia, these actions could be seen as a play for the Chinese market share while deepening Russian competition with Kazakhstan, Uzbekistan, and Turkmenistan. The Kazakhstan-China Oil Pipeline was one of the first pipelines laid.

Nevertheless, Chinese planners state that by 2020, 20% of total Chinese gas consumption will be sourced from the Central Asia – China Natural Gas Pipeline. This transverses Turkmenistan, Uzbekistan, and Kazakhstan before reaching China. Kazakhstan and Uzbekistan are rivals in most cases, but they are transit states in this case, allowing for cooperation to perhaps create positive habits of cooperation. Construction of the Central Asia – China Pipeline was followed by a pricing row leading to the massive reduction in Russian transshipments from 2009 of Turkmen gas to Europe. Currently, 30 bcm/year is supplied by Turkmenistan and 10 bcm/year is supplied by Kazakhstan.

Before the move in late May 2014, Russia was supplying oil to China, much through the Eastern Siberian-Pacific Ocean Oil Pipeline (ESPO Pipeline). This pipeline was controversially planned first by the Yukos Oil Company in 2001 to Daqing as a pipeline outside the control of the Transneft Pipeline monopoly. From May 2003, the Russian government decided that Transneft would supervise the pipeline while Yukos would provide the oil and thence on May 29 2003, China and Russia signed an agreement on pipeline construction. Daqing matters to China as it was the locus of the Chinese petrochemical industry and has a much heritage oil infrastructure and refining capacity.

The Chinese, offering better financing terms than the Japanese, bested their rivals in securing access to Russian East Siberian Energy. This is where Chinese competition for the pipeline was most noticeable due to Russian financial weakness after the global financial crisis. Russia’s weakness was demonstrated by the in-kind nature of the deal signed with China. This plan stated that Russia would supply 300,000 BPD annually for twenty years to China for USD25 billion in loans to Transneft and Rosneft for the development of fields and pipelines. Even before this, the construction of the Chinese spur started on April 27 2008 in Russia and thence in China from May 18 2009. After the completion of the pipeline, the contracted oil shipments to the Daqing terminus China started on January 1 2011.

Now with the 21 May decision, like its oil China is diversifying its natural gas intake. It is estimated that the Chinese have paid USD 350 per tcm for Russian gas, much lower than the eye-watering 475 per tcm that Russia charges some European countries. This is similar to what China paid for gas in the 2013 gas deal with Turkmenistan. Thus at this point it seems that there is little competition between China and its suppliers. This is due to the fact that Chinese utilize their massive monopsony power vis-a-vis other East Asian markets and to the detriment of the pricing power of both Central Asia and Russia.