CHINA-RUSSIA: ENERGY LINKAGES SLOWLY DEVELOPING

• Document Type: FOIA
• Collection: FOIA Collection
• Document Number (FOIA) /ESDN (CREST): 0005304578
• Release Decision: RIPPUB
• Original Classification: U
• Document Page Count: 13
• Document Creation Date: June 23, 2015
• Document Release Date: September 10, 2009
• Case Number: F-2008-01057
• Publication Date: December 14, 2001

China-Russia: Energy
Linkages Slowly Developing
APPROVED FOR
RELEASE^DATE:
04-Sep-2009
 China-Russia: Energy Linkages Slowly
Developing
Key Findings) I Oil and gas exports from Russia to China are negligible but are likely to
slowly expand over the next ten years.
? A proposed oil pipeline from Russia to China is more likely to be fully on
stream in 2010 than a proposed gas pipeline.
? China currently does not need Russian oil and gas but is concerned about
its growing dependence on Persian Gulf oil, which accounts for more
than half of China's crude oil imports.
? Russia is the closest potential supplier of the large volumes of gas that
China probably will import after 2010, given its plans to greatly increase
natural gas use and modest gas resource base.
Progress on building long-distance, high-capacity oil and gas pipelines
from Russia to China will be slow until several key development
challenges are overcome. These include deciding pipeline routing and
financing, confirming sufficient Siberian oil and gas reserves to support the
pipelines, and taking steps to develop China's market for natural gas.
? Beijing probably will not move quickly to resolve these issues because of
its preference for developing domestic resources before foreign ones.
? Nonetheless, Chinese and Russian officials probably will continue their
public support of the proposed pipelines because both see expanded
energy trade as important to strengthening the Sino-Russian relationship,
which is partly aimed at countering US influence, especially in northeast
Both China and Russia oppose US companies participating in the
construction and operation of Russia-China oil or gas pipelines if they
cross Mongolia. However, the inability or unwillingness of Russian and
Chinese oil companies to provide the necessary capital could open the door
to US-company involvement.
 ULAANBAATAR1
Mongolia
from I
West
Siberia
0 Kovykta
Russia
I
BEIJING
North
China
-'Pearl
River
Mouth
I
Uaohe6,
t5zhen
Hong Kong
S.A.R.
Boundary representation is
nd nendssadyrnebo dIIve.
South China
Sea
South
~Kora
usan
j Se
Qingdao
L'
East
China
Sea
600 10ornatem
660 MOes
Selected Existing and Proposed Natural Gas and Oil Pipelines
Urumqi
?Aksu
Qaidam
N. Kyrgyzstan
'Kashi
Existing gas pipeline
- - - - Proposed gas pipeline
Existing oil pipeline
- - - - Proposed oil pipeline
J Selected gasfield
a? Selected oilfield
O Major gas basin
( Major oil basin
China
-Luoyang- .
_~ .- Shangh
 China-Russia: Ener Linkages
Slowly Developin
Energy Fundamentals Point to Expanded
Sino-Russian Energy Trade
China's growing appetite for energy imports-oil in
the near term, gas in the out years-could provide
Russia with the opportunity to supply more oil and
gas to China.
? Oil from these regions usually transits the Straits of
Malacca and the South China Sea, and the PLA has
only a modest ability to protect the lanes of
communication in the South China Sea.
Russia is positioned to become a major supplier of
projected Chinese natural gas imports after 2010
because of its substantial gas resource base and
? We project China's reported total net oil imports geographic proximity. Beijing has ambitious plans to
(crude oil and product combined) of about increase natural gas consumption from about
1.4 million barrels per day (b/d) in 2000 will reach 25 billion cubic meters (bcm) in 2000 to 50 bcm in
5-6 million b/d in 2010. 1 2005 and as much as 100 bcm in 2010, largely to
improve local air quality by displacing coal in the
? Chinese officials and Western experts expect China power, industrial, and urban residential sectors,
to begin importing natural gas by 2010. We according to press reports. Substantial gas imports
believe, based on the stage of gas import projects, will likely be needed to meet these goals because of
that this initially will be as liquefied natural gas China's modest proved gas reserves and lack of long-
(LNG) rather than pipeline gas. distance, high-volume transit pipelines to transport
Chinese press reports indicate Beijing wants to
increase oil imports from Russia to diversify its crude
oil supply. Beijing may look to Russian crude oil
imports as an added measure of energy security
because much of its future oil supply will come from
the Persian Gulf.
? The Persian Gulf provided China with more than
half of its crude imports in 2000, according to
official Chinese statistics, and Western energy
experts project the share will reach 80 to 85 percent
? We estimate China's proved gas reserves are about
1,000 bcm, approximately one-fifth of US proved
reserves and 2 percent of Russia's proved reserves.
? China has only two long-distance gas pipelines-an
864-km pipeline from the Ordos Basin in north-
central China to Beijing and a 778-km offshore
pipeline from the Yacheng field in the South China
Sea to Hong Kong and Hainan Island.
in 2010, according to oil industry cress and
 Chinese Resery s Less Than Meet the Eye
(C/
Chinese press reports commonly claim discoveries of
fields with "reserves " of more than a billion barrels
of oil or hundreds of billion cubic meters (bcm) of
gas. Upon closer examination, however, these
claimed reserves generally appear very different fr?onm
the proved reserves commonly used in the Western oil
indusn y.
? There is no universally accepted definition of
proved reserves in the Western oil and gas industry,
but the tern commonly refers to discovered oil and
gas that can be commercially produced using
available technology under current economic
Being considers its oil and gas reserve estimates
state secrets, but sporadic information in Chinese
press reports indicate that the country's proved
reserves are 15-17 billion barrels of oil and possibly
as little as 900 bcm ofgas, substantially less than the
24 billion barrels and 1,200-1,400 bcm commonly
listed in Western industry publications.
? In comparison, US proved oil and gas reserves
were about 21 billion barrels and 4,650 bcm
(164 trillion cubic feet) at the end of200,0
according to oil industry press reports.
Many Western oil and gas geologists probably would
categorize most claimed Chinese "reserves " as either
resources or oil- or gas-in-place, much of which
cannot be recovered for economic and technical
reasons. As a conservative rule of thumb, about
35 percent of oil-in place and 60 percent ofgas-in-
place typically can be extracted.
? Initial Chinese reserves claims commonly are based
on the results of a single well, an insufficient basis
to make firm reserve estimates.
? China's next large internal gas pipeline project is a
proposed 4,200-km pipeline-with an estimated
total project cost of $12-14 billion-from Xinjiang
to Shanghai, according to Western and Chinese
press reports, but a lack of firm financing or
developed markets makes it unlikely to be operating
at its full design capacity of 20 bcm by the target
completion date of 2005.
Large, long-distance oil and gas transit pipelines
would have to be built for Russia to raise oil and gas
exports to China substantially.
? Russian oil exports now reach China by a
complicated route involving pipelines, barges,
trucks, and trains, which will not be able to handle
large additional quantities of oil, according to oil
industry press.
? There are no gas pipelines between Russia and
China.
Russia-China Oil and Gas Pipelines Under
Prolonged Discussion
The Russian and Chinese Governments and oil
companies since the mid-1990s have been
considering the construction of pipelines to transport
Russian oil and gas to China. Among several
proposed projects, the "frontrunners" are an oil
pipeline from Angarsk in East Siberia to northeastern
China and a gas pipeline from Irkutsk in East Siberia
to Beijing, with a possible extension to South Korea.
These pipelines are more attractive than competing
projects from West Siberia and Central Asia because
of their shorter distances-and therefore lower
construction costs-or location near more established
resource bases (see map on page ii).
? The 400,000-600,000 b/d Angarsk-China oil
pipeline would be 2,300-2,500 km long, would cost
$1.4 -$1.7 billion depending on the route, and could
be operational by 2005, according to
 _:?.V;?:t!.Yea:~:...'.::.~'~"'ll~b~"'i~.:~;w i7,'~Y67A"'~~tii'2zf':~.~..? r.3s:'.~;!:'"s, ?c
Selected Proposed Routes for the Angarsk-China Oil Pipeline
Across
Mongolia
Around
Mongolia
Origin
Angarsk
Angarsk
Beijing
Daqing
400,000-
600,000
400,000-
600,000
Length
(km)
Cost
(billion US$)
Selected Proposed Routes for the Irkutsk-China Gas Pipeline
Route
Origin
Destination
Volume (bcm)
Length
(km)
Cost
(billion US$)
Across
Mongolia
Kovykta
Beijing
20-25
2,700
8-11
Around
Mongolia
Kovykta
Beijing
20-25
4,500
10-13
? The 20-25 bcm Irkutsk-China gas pipeline would
be 2,700-4,500-km long, cost $8-13 billion
depending on the route, and is targeted to be on
stream by 2010, according to press reports
? An extension of the Irkutsk-China gas pipeline
from Beijing to Pusan, South Korea would
increase its length by about 2,000 km and its cost
by about $5.9 billion,
Progress on these proposed pipelines has been
slow, however, with both projects only in the
feasibility study stage. The latest of several
feasibility studies on the Irkutsk-China gas
pipeline began in early 2001, and is scheduled to
be completed in the spring of 2002, according to
press. During the July 2001 Sino-Russian summit,
Russian and Chinese officials and executives from
 Russia's second largest oil producer, Yukos; the
Russian pipeline monopoly Transneft; and China
National Petroleum Corporation (CNPC) signed an
agreement for a feasibility study on an oil pipeline
from Angarsk to northeast China. The study is to be
completed by July 2002, according to Russian and
industry press
Challenges to Russian-Chinese Oil and Gas
Pipeline Development
A number of obstacles have to be overcome before
construction can begin on Russia-China oil and gas
pipelines. Key issues include pipeline routing,
financing, sufficiency of Siberian oil and gas
reserves, and the size of the market for Siberian oil
and gas in northeastern China.
Undetermined Pipeline Routes
The key routing question for both the Angarsk-China
oil pipeline and the Irkutsk-China gas pipeline is
whether they will bypass or transit Mongolia. For the
past several years, this has been a point of
disagreement between China and Russia. However,
press reporting from mid-2001
indicate that the two sides are leaning toward the
longer routes around Mongolia:
? The Sino-Russian agreement to conduct a feasibility
study of the Angarsk-China oil pipeline indicates
that a decision was made to study the route that
bypasses Mongolia to Daqing-China's largest
oilfield and a pipeline hub-according to press
reports.
-Sm~
 A decision on whether the proposed Russia-China
pipelines cross or bypass Mongolia has important
implications for the future of these projects,
especially the Irkutsk-China gas pipeline, because the
feasibility of pipelines is generally distance-
dependent-the shorter the distance, the more
economic the project. A decision to build the
pipeline around Mongolia could make securing
external financing extremely difficult because of the
$2-5 billion higher cost of the longer route.
Lack of Firm Financing
We have no indications that firm project financing for
the proposed Russia-China oil and gas pipelines has
been obtained. Russian companies probably are
unable to independently fund these projects, and the
Chinese appear reluctant to do so.
to press
? Yukos probably does not have the means to finance
the Angarsk-China oil pipeline by itself, according
? According to Russian press reports, Beijing wants
to independently finance and construct the Chinese
portion of the pipeline, a plan which the Russian
Energy Minister claims is "inadvisable from a
technological standpoint." Beijing's interest in self-
financing and construction probably is motivated in
part by a desire to create jobs for Chinese citizens.
The participation of, or financing by, foreign
companies in the proposed oil and gas pipelines will
largely depend on the economics of these projects.
BP, which has a 31-percent stake in the Kovykta
gasfield near Irkutsk, and South Korea's state-owned
Korea Gas Corporation (Kogas), are two possible
sources of funding for a Russia-China gas pipeline.
he route around
Mongolia would raise the gas price for South Korea
to an uneconomic level. If pipeline gas costs more
than LNG imported from Southeast Asia or the
Middle East, South Korea probably will lose
interest in the project, according to press reports.
 Foreign companies will be more likely to help finance
the proposed Russia-China pipelines if Beijing and
Moscow create a more favorable foreign investment
climate. According to
industry press, measures that both
countries could take include strengthening the legal-
regulatory framework, enforcing property rights, and
applying nondiscriminatory policies to domestic and
foreign bidders.
? The inability or unwillingness of Russian and
Chinese oil companies to provide the necessary
capital could open the door to US company
involvement with pipelines that would be built
across Mongolia.
Beijing could also develop more competitive markets
for natural gas. Low Chinese gas prices and an
opaque pricing mechanism are major impediments to
the involvement of foreign and Russian companies in
the proposed Russia-China gas pipeline. China
historically has set domestic gas prices well below
world levels because about 40 percent of gas
production is used to produce fertilizer for low-
income farmers.
Pipeline Oil and Gas Supplies Uncertain
It is unclear whether Russia can now provide
sufficient oil and gas for the proposed Russia-China
pipelines. The Kovykta gasfield, expected to be the
main gas supplier to the Irkutsk-China pipeline, is
still under evaluation and-despite claimed
"reserves" of 1,200-2,000 bcm-has only 340 bcm of
proved reserves, according to press reports.
Russian Energy Politics
The relationships between Moscow and Russian
energy companies interested in participation in the
proposed Russia-China oil and gas pipelines could
have a critical impact on the pace of the development
of these projects. Yukos, Russia's second largest
producer of oil, has considerable political clout,
which it could use to pressure Moscow to lend
political weight to the Angarsk-China oil pipeline.
Moscow could lean on Gazprom, the state-owned gas
monopoly, to invest in the Irkutsk-China gas pipeline
to further Russia's foreign policy objective of closer
ties to Beijing.
? In May 2001, Russian President Vladimir Putin
appointed his acolyte Aleksey Miller to be head of
Gazpr?orrr, a position Miller is likely to use to
strengthen relations with China and other countries
important to Putin,
Yukos and Gazprom are outwardly eager to supply
oil or gas to China. Yukos regards the proposed
Angarsk-China oil pipeline as important to the
expansion of its exports to China, and Gazprom views
the proposed Ir kutsk China pipeline as a way to gain
a foothold in Chinas potentially huge gas market.
? The small quantities of oil Yukos exports to China,
about 10, 000 b/d in 2000, which the firm plans to
quadruple by 2002, are aimed at establishing a
good relationship with China to facilitate the
construction of the Angarsk-China oil pipeline,
according to Russian press.
? Gazprom and two major Western oil companies are
in discussions with PetroChina, China National
Petroleum Corporation 's domestic subsidiary, over
participation in the proposed Xir jiang-Shanghai
gas pipeline, according to press reports.
 Gas Pipeline Faces Limited Competition from LNG
Beijing s plans to begin importing liquefied natural gas (LNG) by 2005 probably will have only a minor
impact on the proposed Irkutsk-China gas pipeline because the projects will supply different markets.
Construction qfa proposed 3 million ton/year (equivalent to about 4.2 billion cubic meters (hcm) gfgas) LNG
terminal, with an associated power plant and 400-4on pipeline grid, in Guangdong Province is to begin in the
second half of 2002 with a target completion date of 2005, according to press reports. Beijing in March 2001
selected BP-Amoco as the foreign partner./by- the terminal construction for this project. Australia, Indonesia
and Malaysia are leading potential LNG suppliers.
The Guangdong LNG project probably will he on stream before the Irkutsk-China gas pipeline because of its
likely shorter construction leadtime and more promising market. LNG imports would supply southern coastal
China, which has the country's highest energy demand but few energy resources.
? Guangdong can purchase oil and gas on the world market for less than on the domestic market because its
location far, fiom China's energy producing regions results in high transportation costs.
LNG imports will not eliminate the need for pipeline gas imports in the long term should natural gas
consumption in China increase substantially. Western energy specialists believe that if China develops a
natural gas grid, then it will need pipeline gas, because natural gas, for which Russia is a clear nearby source,
is much less expensive to deliver by pipeline than as LNG after a transmission and distribution system is in
place, according to press reports.
LNG and pipeline gas imports will also compete for different markets in China. LNG imports probably will be
limited to southern coastal China because of the deep ports needed for LNG carriers,
By contrast, pipeline gas imports will supply interior and northern China, according to
Chinese industry press.
 ? A Russian press report indicates that 1,000 bcm of
proved reserves are needed to support a pipeline to
China, and another press report lists 1,500 bcm as
the minimum amount required.
Limited Short-Term Chinese Demand for Russian
Energy
Middle Eastern and Southeast Asian oil will probably
be less expensive than Siberian crudes in China,
especially in the southeast, where oil demand is
highest.
? A study by Transneft indicates that the cost of
shipping oil by pipeline from oilfields in Russia
across Mongolia to the China border exceeds the
cost of shipping oil from the Persian Gulf to China,
according to Russian industry press.
? Both Beijing and Daqing are far from the oil-
hungry consumption centers along China's
southeast coast, and would require costly additional
transportation to supply this market
The undeveloped Chinese gas market cannot support
Russian pipeline gas at present. Gas accounts for
only 2 percent of China's current energy
consumption, and the 20-25 bcm that the proposed
pipeline would provide matches what China used in
2000. Chinese officials have announced gas
consumption targets of 70-100 bcm for 2010, but
have been vague about the specific steps they will
take to reach this objective.
on the Backburner
Sino-Russian discussions about a proposed power
transmission line fr om Bratsk in eastern Siberia to
Beijing or Shenyang via Mongolia have stalled
because of a lack of Chinese interest. China and
Russia held negotiations on the power transmission
line in 1997, and United Energy System (UES) of
Russia and the Chinese State Energy Company signed
a protocol on cooperation for construction in April
1999. National People's Congress Standing
Committee Chair Li Peng in September 1999 told the
president of UES that China did not need Russian
electricity and that no joint projects would be
developed in the inunediate fiiture, according to
press.
? The proposed 2, 000 to 2,600 kin powerline would
cost $1.5 billion and could transmit 10-18 billion
kilowatt-hours per year, based on a survey ofpress
reports.
 Beijing may also postpone making a firm
commitment to the proposed oil and gas pipelines in
order to concentrate on the exploration and
development of domestic energy resources.
? Beijing has had a longstanding publicly stated
preference for the development of domestic energy
resources over foreign energy resources.
has made firm arrangements for financing the
Angarsk-China oil pipeline.
Implications for China, Russia,
Oil and gas trade between Russia and China will
affect political and economic relations among Russia,
China, and Mongolia, and could have both a direct
and indirect effect on US policy efforts in the region.
China
Even though an oil pipeline from Russia to China is
much more likely to be operating by 2010 than a gas
pipeline, gas pipelines probably will be more
important to China's energy supply in 2020 and
beyond.
Pipeline oil from Russia would only modestly reduce
China's dependence on seaborne oil imports from the
Persian Gulf and Africa.
? The 400,000 b/d of crude oil from the proposed
Angarsk-China oil pipeline would be 8 percent or
less of China's total net oil imports, or
5 percent of total oil consumption in 2010,
according to CIA projections.
In contrast, China could rely on Russia for a
substantial share of its gas supply by 2020. Chinese
energy officials and industry executives acknowledge
that China will need to import 50-100 bcm-or 25 to
65 percent of consumption-by 2020 to meet
Beijing's stated gas consumption targets of 155-200
bcm, according to press reports
compared to 12 import facilities of 3 million metric
tons (equivalent to 4.3 bcm) each that would be
needed to supply a similar amount of gas as LNG.
? Two 25-bcm pipelines can supply 50 bcm,
Despite the modest share of China's oil that an oil
pipeline from Russia could provide over the next
decade or so, Russian energy would provide Beijing a
measure of energy security. Oil carried by these
pipelines will avoid seaborne transportation
vulnerabilities, and we have seen little indication that
China's leadership is greatly concerned about
Russia's reliability as an energy supplier
Greater energy cooperation with Russia could help
Beijing maintain good relations with Moscow-a key
arms supplier-by helping to raise low levels of
trade, which have been a chronic irritant in bilateral
ties. Beijing also sees Russia as a focal point in its
diplomatic efforts to check US dominance.
Russia
Increased energy exports to China would spur
development of the vast resources of Siberia and the
Russian Far East. Boosting oil and gas shipments to
China would yield political as well as economic
dividends, creating jobs that could stem the .
population decline threatening Moscow's grip east of
the Urals.
? Large-scale energy shipments to China would also
serve Moscow's goal of fleshing out the Russo-
Chinese "strategic partnership" by increasing
nonmilitary trade. Moscow, like Beijing, sees this
partnership as an important brake on US actions,
especially in northeast Asia.
9
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