20 Years of Leading Analysis
  • Switching Aims

    1 Posted by: Mikhail Krutikhin September 02, 2014

    “If you don’t like the terms of Gazprom’s gas contracts in Europe, we’ll shut off the pipes and sell our gas elsewhere.” This is what Russian government officials have been telling the Europeans since 2009 when they announced at a conference in Salekhard beyond the Arctic Circle that the "elsewhere' was North America.

    Later, when it dawned on Moscow that the United States needed none of Russian LNG, the same officials started threatening gas consumers in Europe with plans of switching over to the Chinese market. “The export flow of Russian gas to Asia will soon equal or surpass the volumes we are selling in Europe,” managers of Gazprom declared on quite a few occasions.

    On September 1 Vladimir Putin continued this trend while inaugurating the Power of Siberia project, which is to connect gas fields in the east of the country with China. In the future, he said, the national gas pipelines would form a united network to enable Russia to change the routes of energy resources from the west to the east and back depending on the global market situation.

    Simple arithmetic, however, remains the main challenge for this plan. Gazprom sells much more gas in Europe than China would even need to buy from Russia. Last year the export flow beyond the CIS borders totaled 138 billion cubic meters (plus 58 billion cubic meters to former Soviet republics) even as the maximum annual volume of Russian gas China might require is slightly over 30 billion cubic meters, as BP experts estimate. The Asian market is hardly an adequate replacement for Europe in this sense, as well as in the sense of financial value.

    It would be naïve to expect the Chinese to be a reliable customer. The status of the single buyer at the far end of the costly Power of Siberia pipe gives Beijing a very strong incentive to demand changes of contract terms in favor of China—just as CNPC did in a recent oil contract with Rosneft.

    The idea to punish the Europeans by depriving them of Russian gas supply can be a costly affair. Even though the official budget of the Chinese pipeline is 770 billion rubles (21 billion dollars at the current rate), a more realistic estimate is higher. It will take Gazprom at least 22 billion dollars to develop the Chayanda gas field to fill the pipe at an initial stage, plus 15 billion to install gas treatment equipment on the Amur River, plus 33 billion to build the initial, simplest, transportation infrastructure. To raise the annual volume to the desired 38 billion cubic meters by 2030, another gas field, Kovykta, will have to be developed, and connected to Chayanda with an 800-kilometer pipeline, at the extra cost of 22 billion dollars to 25 billion.

    And if Moscow wants to be able to switch the flows from the west to the east, this infrastructure will have to be connected with the western grid by a high-capacity pipeline link that can transport all that gas. The cost of this nationwide project is going to be tremendous, and it is open to speculations where Gazprom can get all that cash, considering the regime of international sanctions against Russia.

    There might be a solution, moneywise. On the same day of September Putin admitted that a Chinese partner may be allowed to farm into the Vankor oil project of Rosneft. It is worth noticing that the big strategic project needs no sophisticated technologies that the Russians could not get. It needs financing.

    Rosneft, following a strategy of grabbing lots of expensive assets (such as TNK-BP), has accumulated a huge debt and pledged a large part of its future oil production to China in exchange for a loan, which is estimated to approach 70 billion dollars. Unable to go on without a steady influx of finance, Rosneft was forced to accept a Chinese partner in a lucrative upstream project in Siberia.

    In the effort to finance the Power of Siberia project, Gazprom may be heading the same way as Rosneft. The only possible source of money for the new pipeline is no one else but China. And the terms of this assistance will be dictated from Beijing. The Kremlin’s inability to come to terms with the Western world does not come cheap.

    Mikhail Krutikhin is a partner at the independent RusEnergy consulting agency.

  • Past Lessons and New Challenges

    Posted by: Eugene Rumer Monday, September 01, 2014 2

    Europe’s and the United States’ principal challenge for the coming years is to develop a new strategy for dealing with its giant neighbor. This strategy will have to be built on a realistic understanding of Russia.

  • The World Will Watch This NATO Summit

    Posted by: Jan Techau Thursday, August 28, 2014

    NATO leaders are gathering for a much-anticipated summit near the Welsh capital. Can they convince observers that they appreciate the scale of the challenges facing the alliance?

  • Khajimba’s Challenges

    Posted by: Thomas de Waal Wednesday, August 27, 2014 1

    Raul Khajimba has attained the position of Abkhazian president at the fourth attempt, but he knows it's a far from enviable job.

  • John Mroz, a Public Diplomat (1948-2014)

    Posted by: Dmitri Trenin Tuesday, August 26, 2014

    John Mroz, who died earlier this month, was the founder of the EastWest Institute, a novel concept of a “think and do tank” which sought to organize Track 2 and Track 1.5 discussions across the Cold War divide. Mroz has departed precisely at the moment when the need for his services has peaked again.

  • Minsk Freeze: Can Ukraine Handle a Compromise?

    Posted by: Balázs Jarábik Monday, August 25, 2014 1

    In the short term, Belarus benefits from the Ukrainian crisis and the stand-off between the West and Russia. However, the worry in Minsk is that Ukraine may yet collapse, dragging Russia along with it.

  • A Historical Change

    Posted by: Dmitri Trenin Monday, August 25, 2014

    Under Putin, it seems that there will be no more celebration of the end of Communist rule: the price paid for it is now deemed to be too high.

  • The World Is Getting Used to the Ukrainian Crisis

    Posted by: Alexey Malashenko Thursday, August 21, 2014 1

    The world is getting used to the Ukrainian conflict and the confrontation between Russia and the West. If Moscow and the Western countries start to consider this state of affairs the new norm, the consequences may be quite unappealing.

  • Shevardnadze’s Lessons For Ukraine

    Posted by: Thomas de Waal Wednesday, August 20, 2014 1

    As Petro Poroshenko embarks on a long steep journey as leader of Ukraine, he would do well to study Eduard Shevardnadze's statecraft in Georgia, with both his great successes and the later disappointments.

  • Missile Seasoning Spices Up the Ukrainian Dish

    Posted by: Alexei Arbatov Tuesday, August 19, 2014 2

    The tensions between Russia and the West heightened over the issues of compliance with the INF treaty. In this case, it would not be prudent for Russia to seriously compromise its long-term security yet again while pursuing tactical goals or relying on superficial arguments.



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