Russia, China look to increase energy cooperation amid Western sanctions

Russia and China are looking to further increase energy cooperation at a time when sanctions have drastically reduced Russia's energy links with the West, participants at the Russia-China Energy Business Forum said Nov. 29.

China is an increasingly important energy partner for Russia, which is aiming to redirect hydrocarbon volumes that traditionally flowed to Western countries after they introduced sanctions in response to the invasion of Ukraine in February.

Russian deputy prime minister Alexander Novak said that energy trade between Russia and China has grown by 64% in monetary terms and 10% in physical terms since the beginning of 2022, the Tass news agency reported.

Rosneft CEO Igor Sechin said Nov. 29 that Russian oil exports to China in January-October 2022 increased by 9.5% year-on-year to almost 72 million mt, according to a company statement. This is equivalent to around 1.7 million b/d.

China has benefited from sizeable discounts on Russian oil since Europe moved to phase out Russian imports.

Platts assessed Russia's key crude grade Urals at $53.30/b on Nov. 28, compared to Dated Brent at $82.65/b, according to S&P Global Commodity insights data. Prior to the invasion of Ukraine Urals was trading at a discount of around $10/b to Dated Brent.

S&P Global estimates that 3.5 million b/d of previous Russian oil exports to Europe will need to be rerouted by Feb. 5, 2023, of which two-thirds will be able to find new buyers.

Russia's plans to redirect these volumes to the East are threatened by strong market competition, China's interest in supply diversity, concerns over the coronavirus pandemic's impact on Chinese demand, as well as Russia's limited export capacity.

Russia supplies oil to China via the major East Siberia Pacific Ocean pipeline, transit through Kazakhstan and via tanker.

Novak said Nov. 29 that Russia is open to Chinese companies taking new stakes in Russian upstream oil projects.

Sanctions have led Western companies to exit Russian upstream projects, leading to speculation that alternative foreign partners may buy in to them. Since the invasion Russia has established new Russian operators for oil and gas production projects Sakhalin 1 and 2 in Far East Russia. Indian and Japanese companies took stakes in the new operators, but Western project participants left. Currently their stakes are controlled by the Russian shareholders in the projects, Rosneft and Gazprom, respectively.

China has increased its investments in Russian energy projects since 2014, when Russian companies' access to Western financing was restricted due to sanctions. Chinese companies already hold stakes in Russian projects including Novatek's Yamal LNG and Arctic LNG 2.

To meet growing Asian demand Rosneft is developing the major Vostok oil project, where it is aiming to reach production of 115 million mt/year, or around 2.3 million b/d, by 2033. Oil produced at the project will be shipped via the Northern Sea Route through Russia's Arctic waters. The route runs through Russian territorial waters in the Arctic and has shorter delivery times and lower costs, as well as less geopolitical risk than traditional routes.

"Cooperation between Russia and China in the Arctic is developing dynamically. We welcome the entry of Chinese partners into projects in the Russian Arctic, including projects for the joint development of the Northern Sea Route and related coastal infrastructure," Sechin said.

Chinese President Xi Jinping described energy as the cornerstone of cooperation between China and Russia in a letter to forum participants, Tass reported.

"China intends to work with Russia to build even closer partnership and cooperation in the energy sector, promote the development of clean and green energy sources, jointly uphold international energy security and the sustainability of production chains, and make new contributions to the long-term reliability and stability of the international energy market," Xi said, according to the report.

Russia is also increasing gas supplies to the East.

Novak said Nov. 29 that exports of Russian LNG to China were up 32% on year in the first 10 months of 2022. Sechin said that in future LNG supplies to China could be at comparable levels to pipeline supplies.

Russia currently exports gas to China via the Power of Siberia pipeline, which launched at the end of 2019. In 2021 deliveries via the route averaged around 41 million cu m/d.

Supplies to China via the pipeline are expected to reach 22 Bcm, or around 60 million cu m/d in 2023, Russian officials said previously.

Russia is also seeking to increase regional cooperation on gas development projects.

Novak said that Russia, Kazakhstan and Uzbekistan are discussing creating a gas union that would coordinate on transport, export and processing and may cover supplies to China.

Russian President Vladimir Putin discussed creating such a union with Kazakhstan's President Kassym-Zhomart Tokayev Nov. 28, according to a Russian government statement.