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PlurkNatural Gas
By Matt Stone
In the space of just a couple of years, natural gas has become the 'next big thing' in energy circles. The recent expansion of unconventional gas production in North America has transformed the United States into the world’s top producer of the fuel. Cleaner-burning than coal, gas is expected to benefit in a carbon-constrained world as it displaces coal in the electricity-generation sector. Moreover a burgeoning interconnected global gas market, spurred by the expansion of the sea-borne liquefied natural gas (LNG) trade, is helping to increase market flexibility so that disruptions like those caused by Russia-Ukrainian disputes have less pernicious effects on downstream countries.
Hoping to take advantage of these developments, China has crafted a strategy for natural gas that aims to increase domestic production and secure access to gas resources in neighbouring countries. For Beijing, gas offers an opportunity to power its growing economy in a less polluting way than burning coal (although coal is expected to remain vital to China’s rapid economic ascent).
Natural gas may also have a role to play in the transportation sector, where Beijing is experimenting in dramatic fashion with compressed natural gas (CNG) in automobiles. Historically, oil’s prominent and essential role in the transportation sector has driven its centrality in international affairs. A transportation sector that could rely jointly on oil and natural gas would allow China to be marginally more indifferent to Middle Eastern geopolitics—in stark contrast with the US experience of the past half-century.
The BP Statistical Review of World Energy 2010 estimates that China produced approximately 85 billion cubic metres (bcm) of natural gas in 2009, while consuming 89 bcm, an import gap that’s expected to expand rapidly in the coming years as gas demand outpaces domestic supply. Indeed, the International Energy Agency (IEA) sees China’s gas demand increasing by 6 percent annually through 2035.
The reality is, though, that the country’s own conventional natural gas resources are nowhere near enough to meet this growing demand, forcing Beijing to ramp up its efforts to access gas supplies abroad—particularly in Central Asia, Russia and Burma.
It’s here that the frequent portrayal of Beijing as a cash-flush power willing to throw money around to lock up resources is misplaced. China has in fact been carefully expanding its influence in Central Asia and Russia in particular, biding its time until the right deal has come along.
Negotiations with Russia over gas supplies, for example, have been ongoing for years (much to Moscow’s consternation). The proposal on the table now would mean two pipelines entering China—one in Xinjiang from the Russian region of Altai and another in Manchuria from the Russian Far East. The former line would have a capacity of 30 bcm per year, the latter 38 bcm per year. But lack of agreement on the price Russian state gas company Gazprom will charge has stalled things.
Of course, there’s more to this than pricing. Although Moscow enjoys a privileged position in the export of Russian oil and gas for both economic and political reasons, its manipulation of energy flows to Europe has tarnished the country’s reputation as a reliable supplier of hydrocarbons. Meanwhile, investments in the gas fields that would supply China have been slow to materialize. Both points will likely have made Beijing think carefully about the implications of an inconsistent supply of Russian gas. This reticence over gas is in contrast with a deal struck over crude oil, with China having issued a $25 billion loan to Russia in February 2009 to secure a 20-year supply of crude oil. At the same time, Beijing has postponed a decision on a loan for natural gas—a conspicuous vote of no confidence in Russia’s short-term attractiveness as a gas supplier.
If the story of the Russia-China gas trade relationship is one of chess-like negotiations and Beijing’s reticence, China’s experience in Central Asia has been more straightforward. China signed an agreement to build a gas pipeline out of Turkmenistan via Uzbekistan and Kazakhstan in 2006. Backstopped with a $4 billion loan to Ashgabat and upstream contracts for China’s state-owned CNPC in Turkmenistan, the pipeline came online in December 2009—impressively swift.
However, now that it’s operational, Beijing has leveraged its position to extract concessions from the countries along the pipeline. Turkmenistan in particular is under pressure. Russia has cut its purchases of Turkmen gas by three-quarters since 2008, prompting Ashgabat to push China to buy more gas. But Beijing, keenly aware of its negotiating advantage, has held out, purchasing only 4 bcm this year.
In the case of Uzbekistan and Kazakhstan, China has spurred competition for access to the pipeline, with the two engaging in development of gas fields and infrastructure in order to access the pipeline before the other. That said, China may decide it’s in its own interests to selectively manage access to the pipeline in order to win concessions on price and upstream contracts in each country, which would provide it potent political leverage with countries that would prefer to develop robust alternatives to exporting hydrocarbons to Russia.
Image credit: Tod Baker