President Obama’s recent trip to Beijing to attend the APEC Summit received wide media coverage for the signing of a fuzzy—and most likely inconsequential—climate agreement with China. Much less trumpeted was the blow to U.S. foreign policy that China delivered Mr. Obama on the eve of the visit: the signing of a framework agreement with Russia’s state owned Gazprom, a precursor to yet another major Sino-Russian gas deal. This was a signal to Washington that Beijing has decided to bet its future on Vladimir Putin’s gas, rather than America’s.
The first step in forging this energy alliance between the world’s largest energy exporter and the world’s largest energy importer occurred in May, when the two countries signed a thirty-year deal to supply 38 billion cubic meters (bcm) of Russian gas from eastern Siberia to China’s northeastern provinces through a pipeline called Power of Siberia. The deal came at an opportune moment for both countries.
Losing ground in Europe, Russia desperately needs a new market for its hydrocarbons. Meanwhile China, engulfed in pollution, bewildered by a wave of domestic unrest from Xinjiang to Hong Kong, and disenchanted about the prospects of replicating the American shale revolution, needs a big infusion of low-priced gas. But the Power of Siberia, which Putin called “epochal,” may soon be eclipsed by the new deal the two countries seem to have agreed on: the China-Russia West Route, which will connect gas deposits in western Siberia with China’s Xinjiang autonomous region via Russia’s Altai region.
In America, the announcement on the agreement on the Altai project was received with a yawn. “No big deal,” wrote one energy expert who argued that the deal is “no more than an effort to placate Putin and distract him from the real news of the APEC summit: that the U.S. and China are willing to work together to address climate change.” But the Altai project is not only a big deal; it is an even bigger one than its eastern cousin, first, because the volume of gas that can be shipped from western Siberia (initially 30 bcm) could eventually be almost three times more than from the eastern route, and second, because accessing Xinjiang will eventually enable Russian gas to connect to the West-East pipeline system traversing the Chinese mainland and ending in China’s largest population centers, including Shanghai and Guangdong.
If executed, these two mammoth pipeline projects would have far-reaching implications for the world, as they would essentially allow Russia to envelop its southern neighbor in a giant bear hug from both east and west, hence solidifying Russia’s foothold in what will eventually become the world’s largest economy. The pipelines would also dampen America’s ambition to become a major exporter of liquefied natural gas (LNG) to Asia. Russia’s piped gas will make U.S. LNG less competitive in the Chinese market. It will also drag down the global price of LNG, making American gas less competitive against other suppliers to Asia like Qatar and Australia.
China’s dependence on Russia will completely immunize the Kremlin from future international reprisals, making America’s objective of isolating Putin far more difficult. But in the long run there would a far more profound implication. China’s energy alliance with Russia is likely to irritate America’s allies in Asia—especially Japan, whose relations with both Russia and China are historically troubled. This could drive Tokyo closer to Washington, dragging the U.S. into a prolonged and potentially explosive power struggle in the Pacific.
In the next several months, Washington will have to work hard to ensure that the framework agreement does not develop into a final one. The key for America’s counter-strategy is money. Gazprom’s biggest vulnerability is financial. The company’s annual overheads stand at $25 billion, and it is barely capable of financing its prior commitments to major projects in Europe aimed at bypassing Ukraine. The estimated cost of constructing the Power of Siberia pipeline is in excess of $20 billion. The Altai pipeline is estimated to cost $15 billion. Many additional billions will be needed to develop Siberia’s fields. Without international bank loans, these projects have a better chance of remaining on the drawing board.
The decline in oil prices is bad news for Russia, which needs oil prices over $105 a barrel to balance its budget next year (see chart below). This means that Washington must not only ratchet up its pressure on international lending institutions to withhold funding for Russia’s pipeline projects, but it must also ensure that North American oil continues to pour into the market.
The question is: Will Washington find the bandwidth to do that? From ISIS to the Ebola crisis, the Obama Administration’s hands are full, and its interest in pipelines in mostly reserved to Keystone. But the real big story of our time is unfolding far away, in Siberia. Never since the construction of the Suez Canal has an infrastructure project held the potential to shape the world’s security landscape as much as Russia’s energy arteries to China. Failure to block this effort now would give rise to a power dynamic in which today’s pressing security challenges could become fond memories.