China’s President Hu Jintao has a reserved demeanor. So it is hard to imagine him as a poker player. But in energy politics with neighboring Russia, he certainly is.

On a visit in midyear to the world’s biggest natural gas exporter and one of the top oil suppliers, Hu made it plain that his energy-hungry nation had a voracious appetite for Russian resources to fuel its economy.

He talked about Sino-Russian trade growing from $55 billion in 2010 to$100 billion by 2015, and $200 billion by 2020. Much of this would be Russian energy exports to China, including oil, gas, hydro-electricity and coal.

Indeed, a long-term framework for a strategic partnership is already in place between Russia and China, to be built largely on energy cooperation. The first bilateral accords on joint projects in the energy sector were signed in 2006, to be implemented over the next 15 years.

One became fully operational in January, with Russia’s state-owned oil company Rosneft pumping oil to China through a new pipeline. But a second, involving construction of two separate gas pipelines from Russia to China, has been delayed by a protracted disagreement overpricing.

Meanwhile, both sides have argued over the amount China should be paying for the pipeline oil. The third project, a joint venture to build an oil refinery and retail fuel station network in China, is also mired in dispute.

For the oil pipeline, China loaned $25 billion to Rosneft and the Russian pipeline monopoly Transneft, in exchange for oil imports from Russia for 20 years. From January, the volume was to be 300,000 barrels per day.

Although these energy deals seemed to be complementary, finding a mutually acceptable balance of advantage has so far proven difficult for Moscow and Beijing. China claims it is being overcharged by Russia for the pipeline oil and has demanded that the pricing formula be revised downward. It has reportedly withheld $85 million in payments to the Russian companies. They insist that China is underpaying and is in breach of contract.

China appears to be playing hardball, signaling to Russia that unless acceptable pricing arrangements for both pipeline oil and gas are agreed, the promised energy cooperation will not go ahead as planned.

Some Chinese analysts had predicted that with the oil pipeline in place, Russia would become one of the top three oil suppliers to China, easing its dependence on imports from the volatile Middle East and Africa by sea through the Malacca and Singapore straits. China imports over 55 percent of its oil, of which over 80 percent is from the Middle East and Africa.

Pipeline gas from Russia was seen as strategically vital for China too. The two proposed gas pipelines were to carry as much at least 68 billion cubic meters (BCM) per year of Russian gas to China, about two-thirds of total Chinese gas consumption in 2010.

To reduce its heavy reliance on polluting coal, China plans to raise cleaner burning gas consumption in its energy mix to 10 percent by 2020,from around 4 percent today. The first pipeline from Russia was supposed to start delivering gas to China this year. But despite extensive negotiations,the two sides have been unable to reach a pricing agreement.

Meanwhile, China has developed another overland gas pipeline route from Turkmenistan in Central Asia. According to a recent assessment by British oil advisory firm Gaffney, Cline & Associates, Turmenistan has the world’s second largest gas reserves after Russia.

Since it opened in late 2009, the 7,000-km pipeline from Turkmenistan through Kazakhstan and Uzbekistan to China has proven to be a reliable supply source. Last month, China and Turkmenistan agreed to double the pipeline’s annual capacity to 60 BCM per year by 2015, not far short of the amount the two Russian gas pipelines to China were intended to carry.

In addition, Beijing signed an accord with Kazakhstan this month to more than double the volume of pipeline gas exports to China to 25 BCM by December 2015. Beijing reached an agreement with Uzbekistan in June 2010 to deliver 10 billion BCM of pipeline gas to China and this amount may also rise.

Beijing is trying to drive a hard bargain with Moscow on gas prices now that it has contracted to import large quantities of liquefied natural gas from Australia and the Middle East, and pipeline supplies from Burma as well as Central Asia. The trans-Burma pipeline is under construction and is designed to deliver 14 BCM of Burmese gas to China from 2013.

Russia calculates that world gas demand will rise as governments seek to cut coal use and re-evaluate their commitment to nuclear power after the disaster with several reactors in Japan earlier this year. Gas is the cleanest of the fossil fuels.

However, in its game of energy poker and pipeline politics with Russia,Beijing is evidently gambling that a decline in oil and gas prices as global economic growth slows will force Moscow to drop its prices to secure long-term energy deals with China. There is currently a global gas glut that is largely the result of a boom in shale gas output in the U.S.

At present, most of Russia’s export gas and much of its oil goes to Europe. But the Russian economy is dangerously dependent on oil and gas sales. They account for as much as half of Russia’s gross domestic product. Although Russia has huge exportable reserves of energy particularly in Siberia and the Arctic, it needs secure foreign sales to be able to exploit them. China is a potentially huge market — but only if the price is right.

Michael Richardson is a visiting senior research fellow at the Institute of Southeast Asian Studies in Singapore.

In a time of both misinformation and too much information, quality journalism is more crucial than ever.
By subscribing, you can help us get the story right.