Russia and China's Energy Dispute and the Struggle for Eurasian Dominance

Oilprice.com

Written by John Daly

China’s voracious appetite for energy from anywhere has led most oil-producing nations to attempt to feed the dragon, including Russia.

But a curious situation has developed as regards Russian oil exports to the Celestial Kingdom, underlining that the two nations, which fought for global supremacy over the Communist movement for four decades, remain at best, “frenemies.”

According to Chinese customs reports, last month oil imports from Russia fell by nearly half.

Not so, Rosneft says, stating that deliveries are proceeding through the Eastern Siberia-Pacific Ocean (ESPO) oil pipeline at their normal levels.

Russia is now China’s ninth largest source of oil imports, with Saudi Arabia first, Iran second and Angola third.

In trying to read the tea leaves in the contradictory statements emanating from Beijing and Rosneft, Russian analysts believe that China is sending Moscow a not so subtle signal that it can do without Russian imports.

The Eastern Siberia-Pacific Ocean oil pipeline began deliveries to China last January, at a volume of 300,000 barrels a day. Last month China imported 4.58 million barrels per day, with Russian imports making up a mere 6.5 percent of the total.

So, where’s the beef?

Money, apparently.

According to the 2009 Russian-Chinese intergovernmental agreement, oil deliveries to China through the Eastern Siberia-Pacific Ocean pipeline are made under contracts among Russian oil company Rosneft, Russian state-owned pipeline monopoly Transneft, and the China National Petroleum Corporation (CNPC) for 15 million tons a year over two decades. In exchange for guarantees of long-term oil deliveries China provided Transneft and Rosneft with loans of $10 billion and $15 billion respectively.

But at the beginning of 2011 the CNPC started underpaying for Russian oil, as China demanded a revision of the price formula. It currently includes the price of transporting oil along ESPO’s entire route to the port terminal in Kozmino. But as the branch to China begins at the point of Skovorodino, 1,271 miles from Kozmino, China is insisting that the pricing formula must be revised and that the cost of transportation from Skovorodino to Kozmino must be subtracted from it, with Beijing originally estimating the difference at $12 a barrel, underpaying accordingly.

Accordingly, China’s debt as calculated by Moscow is now approximately $85 million. In a telling comment on the validity of both Russia and China’s court systems, Rosneft and Transneft have begun consulting with lawyers about the possibility of initiating a lawsuit against the CNPC at the London Court of Arbitration. Earlier this month Transneft sniffed that if the case goes to court, it is prepared to return to China the $10 billion received in 2009 and to stop transporting Russian oil to China, unilaterally abrogating the 20-year contract.

Switching gears, China is upping the stakes to begin discussions at the governmental level to resolve the impasse. Chinese negotiators have invited Russian Energy Minister Sergei Shmatko to participate in the next round of talks, which is to take place in Beijing starting at the end of August, when it was originally assumed that only Rosneft and Transneft representatives would be participating in the discussions.

Konstantin Simonov, general director of the National Energy Security Foundation, is convinced that China is indulging in a bit of good old fashioned “provokatsiia,” to use a Soviet word, telling reporters, "The statement by the Chinese customs is of a provocative nature: The Chinese are endeavoring to show that Russia is not fulfilling its contract obligations and is casting doubt on the development of energy relations with China as a whole."

The reality is that Russia and China’s struggle for Eurasian dominance did not end with the 1991 collapse of Communism. The implosion of the Soviet system left many Russians feeling disoriented and it is worth remembering that the USSR was a continuation of the Russian Empire, which began to expand eastwards into Siberia in the later part of the 16th century.

Many Russian intellectuals bemoan the fact that Gorbachev liberalized the political system but not the economy, leading to the Soviet Union’s demise as China liberalized the economy while keeping tight Communist Party control, leading to the country’s dazzling economic achievements of the last decade.

The rivalry is evident in Moscow and Beijing’s contrasting visions of the Shanghai Cooperation Organization, which Russia sees primarily as a military structure, while Beijing favors increased economic integration. Both nations are engaged in an ongoing “Great Game” for the hearts, minds and economies of the former Soviet Central Asian states, with their rich energy assets. Beijing is making serious inroads there, not least of because of their deep pockets and the locals’ bitter memories of seven decades of Soviet domination.

Last but not least are Russian atavistic fears of the “yellow peril” and its threat to eastern Siberia, still largely devoid of population, large swathes which Russia acquired by the 1858 Aigun Treaty, which ceded the left bank of the Amur River to Russia and the 1860 Convention of Beijing, under which Russia gained control of Outer Mongolia. Both the Chinese Empire and subsequently the People’s Republic of China referred to them as “unequal treaties” until Prime Minister Zhou Enlai acknowledged them in 1969 in an effort to improve Soviet-Chinese relations in the wake of a series of violent frontier clashes along the Amur River earlier that year.

The struggle between the two nations is a fascinating study in opacity. Russia, the energy superpower versus China, the economic superpower. Amidst the energy pricing squabbles and ongoing covert struggle for influence in Eurasia, Beijing and Moscow nevertheless find common ground on one topic – limiting the influence of the United States. If 42 years ago Soviet and Communist Chinese politicians could hammer out a border agreement, what’s a mere $85 million among friends?

By. John C.K. Daly of OilPrice.com