Chinese Pipe Dreams
Image Credit: Flickr / ezioman

Chinese Pipe Dreams

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The extensive media coverage of the new Russia-China oil pipeline, which became fully operational over the weekend, underscores just how revolutionary the development is.

The pipeline is the first to move crude oil directly from Russia, which was the world’s largest producer of oil in 2009, to China, which in 2010 became the world’s largest energy consumer. Indeed, some analysts note that if added to the existing rail shipments, the volume of Russian oil delivered to China could more than double in a few years. If this happened, it would fundamentally transform the energy relationship between these two Asian great powers, which until now have pursued largely independent, and in some ways competing, energy strategies.

The reality, though, is that Russian oil shipments to China are unlikely to see such a sharp increase anytime soon. The main reason is that although Russia wants to export more oil to Asian customers, this doesn’t necessarily mean the main recipient will always be China.

It wasn’t until 2009 that Russia became even China’s fourth-largest oil supplier, providing 7.8 percent of China’s imports in 2009, up from 6.3 percent in 2008. Such a low figure is perhaps surprising given that the two countries would seem to be natural energy partners given their geographic proximity, Russia’s tremendous energy resources, and China’s rapidly growing demand for energy.

In addition, Russia’s oil and natural gas deposits, some of the largest in the world, lie much closer to China than that country’s more distant energy sources in Africa and the Persian Gulf. This means that whereas oil and gas from these continents can only reach China through international waters vulnerable to interdiction by foreign navies and sea pirates, energy supplied from neighbouring Russia can enter Chinese territory directly by secure land routes.

So why haven’t energy ties been flourishing? Until recently, the key reason was the underdeveloped transportation infrastructure connecting the two countries. For example, most crude oil was sent by railway through the Zabaikalsk-Manzhouli border oil reloading terminal on the Chita-Harbin-Vladivostok railroad, a line with limited capacity and one that’s very costly to run. Not only is rail transport about two and a half to three times as expensive for Russian oil producers as shipments by pipeline, but rail deliveries to China involve the added cost of changing rail cars at the border because of the different gauges of track used by the two countries.

All this means that transporting oil (and gas) via pipeline is significantly more efficient. Yet the two governments have long engaged in divisive negotiations over which pipelines to build, where to locate them, the schedule for their construction, and who will pay to build and maintain them.

Comments
3
Anonymous
January 11, 2011 at 19:10

Ernst- Nice one liner (first sentence is only thing relevant), no reasoning as expected.

You have no clue how China-US foreign policy goals are mixing because there is no objective answer thus far as they have not played out yet. Wait another 5-10 years.

Ebag Xor
January 4, 2011 at 04:08

So China is holding up this pipeline by demanding sub-market prices for oil? If China anticipated their economy needing this oil as badly as western analysts predict, wouldn’t they be more flexible? It’s not like they don’t have cash reserves. The Chinese hard-line on discounts seems to argue that the Russians aren’t the only ones with options. The Chinese are clearly able to get sub-market prices from other suppliers, possibly from Africa or Venezuela where they can strong-arm leaders more effectively than they can with Putin. This article implies that the Chinese are acting irrationally when demanding discounts, but I would make the opposite assumption.

Ernst
January 3, 2011 at 18:46

Phew! So China is still a sad sack, albeit a sad sack outmaneuvering the U.S. in any objective foreign policy terms, right? I, as an American, am mollified. Thank you, and thank you to your handlers at RAND.

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