After 20 long years of negotiations and 15 frustrated attempts, China and Russia finally inked a natural gas deal on May 21. The 30-year $400-billion agreement made waves in the global energy market and in diplomatic circles. Its significance in international politics aside, the deal will be of fundamental importance to China and Russia in their respective economic sectors.
The Chinese market is irreplaceable to Russia's energy exports and perhaps even to the whole of the Russian economy. This year, in a draft of energy strategies for the next two decades, the Ministry of Energy of the Russian Federation said it plans to double its oil exports to Asian countries by 2035 and expand its natural gas exports four-fold. As the world's second largest economy, the biggest manufacturing country and the largest potential energy consumer, China is without doubt the most important export destination for Russia. The Kovykta gas field in Irkutsk, the source of future gas supplies, holds 1.9 trillion cubic meters of gas and is one of the largest undeveloped gas fields in the world. However, the local demand for natural gas is very limited, and the gas field is located far away from Russia's conventional natural gas export destinations in Europe. Therefore in the early 1990s, Russia had planned to sell the gas in Kovykta to the Asian market, even at the exploratory stage.
For China, this deal provides a considerable source of gas for the foreseeable future, satisfying the country's growing demand for natural gas. In the 21st century, oil and gas prices have been soaring, fueling growth of coal consumption. In the breakdown of China's energy consumption, the proportion of oil reduced from 22.2 percent in 2000 to 17.9 percent in 2009, while the proportion of the clean and low-emission natural gas rose from 2.2 percent in 2000 to 5.3 percent in 2012. Serious bouts of haze has forced China to change its energy and environmental protection policies and tighten its emission standards. As a result, China's consumption of natural gas may rise for quite some time to come.
In regard to China's natural gas demands, imported gas is indispensable. Although China has large prospective reserves of natural gas, most of these reserves have not yet been confirmed and the projected exploration costs are high. Were China to rely on domestically produced gas alone, the supply would not be sufficient and the prices would skyrocket, raising production costs for downstream industries and making China's manufacturing industries less competitive. For this reason, China has already become the world's third largest gas-importing country, following its neighbors Japan and South Korea. In 2013, the country produced 117.8 billion cubic meters of natural gas, while the amount of imports reached 52.9 billion cubic meters. Owing to its proximity to Central Asian sources of natural gas, Urumqi, the capital city of northwest China's Xinjiang Uygur Autonomous Region, has become the first provincial capital in the country to extensively use natural gas.
Against this backdrop, one may well imagine what the China-Russia gas deal will mean for China. According to the agreement, the east route pipeline will begin providing China with 38 billion cubic meters of natural gas annually from 2018. China's National Development and Reform Commission plans to make the country's natural gas supply reach 400 billion cubic meters by 2020, and the 38 billion cubic meters of imports from Russia will account for nearly 10 percent of China's total supply.