Russia’s large oil and gas resources in East Siberia and the Russian Far East have been stranded during most of the post-Soviet era due to the lack of an obvious market. However, economic growth in the Asia-Pacific has provided an obvious outlet for these hydrocarbons, and the Kremlin has been encouraging its main energy companies to turn their attention to the east. This “pivot to Asia” has been further encouraged by Russia’s increasingly difficult relations with its historic partners in the West following the annexation of Crimea in 2014 and the subsequent imposition of U.S. and EU sanctions. In the oil sector, Rosneft has led the move to increase exports to Asia. But although this infrastructure was intended to diversify opportunities in the region, in reality Russia’s oil exports are dominated by sales to China. In the gas sector, Gazprom is no longer the only major player. Rosneft has been pursuing its own projects, while Novatek has emerged as Russia’s liquefied natural gas (LNG) champion. Overall, a natural marriage between Russian resources and Chinese demand is starting to take shape, and oil and gas exports could become an important foundation for the strengthening of ties between the two countries over the next few decades.
The China-Russia energy relationship is more robust than it has been at any other time over the past decade. Russia’s crude oil exports to China more than quintupled between 2008 and 2017, with the country displacing Saudi Arabia as China’s top crude supplier in 2016. Meanwhile, Russia is poised to become a major supplier of natural gas to China within the next decade as new export projects commence operations and ramp up to full capacity. The primary driver of the deepening bilateral energy relationship has been the strategic provision of capital by Chinese financial institutions to Russian energy companies both to secure large-volume, long-term contracts for oil and natural gas supplies and to develop the infrastructure to deliver them to China. These institutions provided this support not only to enhance China’s energy security by diversifying its oil and natural gas suppliers and import routes but also to advance other national objectives, such as transforming the country into an advanced manufacturing superpower and gaining access to Arctic shipping routes. A secondary driver of the deepening energy relationship is the emergence of new Chinese crude importers.
China’s imports of Russian crude oil have more than quintupled over the past decade, increasing from 234,000 barrels per day (bpd) in 2008 to 1.2 million bpd in 2017.4 Russian crude exports to China topped 1 million bpd for the first time in 2016, the year Russia surpassed Saudi Arabia to become China’s largest supplier of crude oil on an annual basis. Saudi Arabia had previously held this position every year from 2001 to 2015, except for 2007, when Angola occupied the number one slot. Russia retained its status as China’s largest oil supplier in 2017, increasing its share of China’s crude oil imports to 14%.
Russia’s emergence as China’s largest crude oil supplier is underpinned by the development of the Eastern Siberia–Pacific Ocean (ESPO) pipeline and its spur to China, which allow Russia to export large volumes of oil to China by land and by sea.The ESPO pipeline, which was built in two phases, runs from Taishet in East Siberia to Kozmino Bay on Russia’s Pacific coast. The first phase (Taishet to Skovorodino) went into operation in 2009 and has a capacity of 1.2 million bpd. The second phase (Skovorodino to Kozmino) commenced operation in 2012 and has a capacity of 1 million bpd, of which around 630,000 bpd go to Kozmino. The so-called ESPO spur comprises two parallel pipelines running from Skovorodino to Mohe on the Chinese border for onward delivery to Daqing. The first line went into operation on January 1, 2011, and the second line started deliveries on January 1, 2018. The two lines of the ESPO spur have the capacity to transport 600,000 bpd.
In 2017, Russia exported 464,000 bpd to China from Kozmino Bay. It also delivered 335,000 bpd via the ESPO pipeline spur and 200,000 bpd via the Kazakhstan-China oil pipeline. The remaining 200,000 bpd probably travelled to China by rail or sea.
Russia is also poised to become a major supplier of natural gas to China. The Power of Siberia pipeline will deliver natural gas three thousand kilometers from fields in East Siberia to the Chinese border. Deliveries are scheduled to start in December 2019 and will gradually ramp up to 38 billion cubic meters (bcm) per year. Meanwhile, the first phase of Yamal LNG (liquefied natural gas) began operations in December 2017. The project is slated to reach full capacity in 2019 and will ship 5 bcm per year to China. Russia and China are also interested in continuing negotiations on the Power of Siberia–2 pipeline, and firms from both countries have discussed the Arctic LNG–2 project as well. The 43 bcm of Russian gas already contracted by China is greater than the amount that it imported from Turkmenistan (33 bcm), China’s largest natural gas supplier, in 2017. If China were to import 43 bcm from Russia in 2023, this would constitute 25% of the natural gas that the International Energy Agency (IEA) projects China will import in that year.
The primary driver of the growth in bilateral energy relations over the past decade has been China’s ability to use capital to pursue strategic opportunities vis-à-vis Russia, especially after the global financial crisis in 2008 and the imposition of Western sanctions on Russia in 2014 for its annexation of Crimea. As a result, Moscow has increasingly looked to China to replace some of the capital and technology it would have otherwise received from the West. While Chinese entities have not provided Russia with everything it wants, they have offered enough to substantially deepen the bilateral energy relationship in ways that further a mix of corporate and national objectives.
Despite the impressive growth in Russian crude oil exports to China over the past decade, the vast majority of the country’s crude oil imports will continue to travel through major maritime chokepoints such as the Strait of Hormuz and the Strait of Malacca. To be sure, Russia has contributed more than any other country to the diversification of China’s oil import routes. The 1.2 million bpd that it delivered to China in 2017 travelled either overland or only a short distance by sea. In contrast, Kazakhstan, China’s other overland supplier, only exported 50,000 bpd to the country in 2017 because of production declines in the region where crude for the Kazakhstan-China oil pipeline is sourced. Together, Russia and Kazakhstan provided 14% of China’s crude oil imports in 2017.
However, the projected growth in China’s oil imports over the next five years will likely be greater than any increases in crude deliveries from Russia and Kazakhstan. For example, the IEA expects China’s crude oil imports to grow from 8.8 million bpd in 2017 to 10.8 million bpd in 2023. For comparison, the combined capacity of the ESPO spur, the port of Kozmino, and the Kazakhstan-China oil pipeline is only 1.63 million bpd. Even if all this capacity were used to deliver crude oil to China, the share of its total imports supplied by Russia and Kazakhstan would remain around 15% in 2023. The remaining 85% would continue to travel long distances by sea and pass through major maritime chokepoints.
China and Russia are forging closer ties to build a “multipolar world” and challenge what they lament as U.S. unilateralism. Energy ties are the backbone of this evolving economic partnership: China has become Russia’s main source of funds and its single biggest energy customer. Yet recent developments do not indicate the formation of a true strategic partnership that is based on a common set of values or a developed worldview that encompasses both powers. China is interested in purchasing Russian oil and gas, but still privileges economic relations with the U.S. Russia, meanwhile, feels uncomfortable about the growing power asymmetry with China, which highlights a shortcoming in the Kremlin’s claim of resurgent Russian greatness. Russia also displays a state-led mercantilist economic policy that seeks to augment its prowess at the expense of China. While a status-concerned Russia might in principle welcome a firm alliance meant to discomfit the U.S., there is limited value in advancing a strategic alignment (let alone an alliance) for China. Beijing has the upper hand, and keeping its options open will continue to deliver maximum benefits.