HenryTo
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 Posted: Wed Jun 15, 2011 12:06 pm Post subject: China's Energy Needs |
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Courtesy of Stratfor:
| Quote: | Vice President of Analysis Peter Zeihan discusses the logistical and geopolitical challenges to Sino-Russian energy integration.
Editor’s Note: Transcripts are generated using speech-recognition technology. Therefore, STRATFOR cannot guarantee their complete accuracy.
Talk is bubbling in China and Russia again about a natural gas deal that would link the two countries together. On the surface, this seems like a no-brainer - honestly why hasn’t it happened before? Russia’s the largest exporter of raw commodities in the world. China’s the largest importer of raw commodities in the world. It seems that it should already be a very robust trading relationship between the two, but there’s not. Until now, most of the public and even private debate between the two, the negotiations of a natural gas deal, have focused on price. The Chinese want to pay no more than about $100, $150 per thousand cubic meters, which they say is the domestic price of natural gas in their country, and they’re right. The Russians say they will accept nothing less than the European price, which is $350-$400 per thousand cubic meters, which is what they say they charge all their other customers, which is also right. It’s not that price isn’t an issue but the real problem is not the price of natural gas but the price of the project.
Russia and China, while they seem to be right next to each other on a map, are very large places. Their population centers are wildly divergent, several thousand kilometers apart, and the natural gas in Russia for the most part is nowhere near the population centers in China. There is one field, a large one, the Kovykta field in eastern Siberia, that’s fairly close. Kovykta is about 3000 kilometers from Beijing, but the natural gas really needs to go further south to the southern coast of China. Based on location that adds another 1 to 2000 kilometers to the pipeline. And Kovykta simply isn’t large enough to make a meaningful dent in Chinese energy demand. For that, you have to go much, much for the northwest and north central Siberia so now you’re talking about a natural gas project that is 7, 8, maybe even 9000 kilometers long, most of it through completely virgin wilderness, so the cost of development would be ridiculously high. This is not like building a natural gas pipeline from Canada to the United States where there is already a robust road and rail network. This is going through swamps. This is going through mountains. This is going around Mongolia. This is a huge project. Conservatively, very conservatively, this is $100 billion infrastructure project. More realistically it’s more like $300 billion and that doesn’t even include the cost of building a natural gas grid in China in order to take advantage of the gas. Even now the Chinese do not have a unified system like most states.
The distance and cost issue should on its own merits explain why the project has been under discussion for over a decade but really hasn’t gone anywhere. But there is one more reason: the two countries simply don’t trust each other all that much. Both have had territorial designs on the other in the past and, while relations are certainly the warmest point in the last 50 years, they’re not perfect. In fact the Russians are shown vibrantly that they are willing to invest tens of billions of dollars in projects that make themselves less dependent on the Chinese. A good example is the ESPO pipeline (East Siberia Pacific Ocean), which starts in the area of the Kovykta field gathering oil supplies and shifts it out to the Pacific Coast. All told this is a $50 billion project once you take into account the 4000 kilometers of pipe, the super port on the Pacific Ocean, the refineries along the way and all the various assorted infrastructure that was required simply to be able to build the pipeline. The Russians could’ve built a much shorter, cheaper pipeline to China directly, but the Russians wanted to make sure that they had access to the wider world and a variety of customers, rather than being held hostage to the prices that the Chinese may or might not pay if they had a dedicated pipeline.
And so the future of energy cooperation between the two countries will undoubtedly grow but $2-$300 billion infrastructure tag? That’s pretty doubtful. And timing is a big issue here too. The Russians have been working for the last 35 years to build one of these megaprojects starting in the Yamal Peninsula going down the Europe. That project is now finally nearing operational status but it took 35 years and tens of billions of dollars of investment. Even if the Chinese do agree with the Russians on every aspect of what would be the world’s largest infrastructure project ever, it’s not going to come online until 2030. |
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