Hu Angang：Consequences of Cooperation Between Russia and China in the Global Natural Gas Market
The signing of a cooperation agreement between Chinese and Russia energy companies is, without a doubt, a major breakthrough, and an important emblem of the comprehensive strategic partnership between Russia and China, as well as their cooperation in the new era. As Chinese President Xi Jinping stated at the Second China-Russia Energy Business Forum, China and Russia have a vast amount of territory, and great potential in the area of energy cooperation, writes Hu Angang, Economics professor at Tsinghua University, China.
By Hu Angang | valdaiclub.com | June 17, 2019
The author is dean of the Institute for Contemporary China Studies and professor of School of Public Policy and Management at Tsinghua University.
In recent years China’s natural gas consumption has increased rapidly: its share of world consumption increased from 3.4% in 2010 to 6.6% in 2017. Therefore, one can assume that there is considerable room for additional imports.
Meanwhile, Russia is the world’s largest producer of natural gas: in 2017 it produced 17.3% of the world total, while its consumption accounts for only 11.6%; hence, there is considerable export potential. Therefore, China and Russia complement one another in natural gas consumption and production, with the potential to form a stable and long-term cooperative relationship in which Russia becomes China's largest source country of natural gas imports.
In addition to the China-Russia East-West natural gas pipeline project, now under construction, the cooperation between China and Russia extends to the foundation of a joint venture to develop an Arctic LNG project, whereby Russian LNG and natural gas will be directly transported to the coastal areas of China. This represents the most convenient, low-cost, high-efficiency and competitive way for Russian LNG to enter the Chinese market.
China’s long-term growth in demand for natural gas consumption is mainly due to two circumstances. First, its long-term demand is due to national economic development; China’s natural gas consumption is experiencing high-elasticity growth, greater than the 6% economic growth rate. Second, China is now fostering a transition towards a green, low-carbon, and sustainable development model, which demands an increase in the proportion of natural gas in China’s energy consumption mix of at least 15% before 2030. This means that China is about to become the world’s largest importer of natural gas. The International Energy Agency (IEA) 2018 World Natural Gas Market Report pointed out that China will become the world’s largest natural gas importer in 2019, and its import dependence will rise from 39% to 46%; most additional annual imports will come from LNG.
From the perspective of China’s energy supply structure, in 2018 natural gas production accounted for only 5.5%, accounting for 3.0% of the world total. With regard to China’s energy consumption structure, in 2018 natural gas accounted for 7.8%, 6.6% of the world total. The gap between supply and demand is clear. Hence, it is imperative that China import a large amount of natural gas.
China’s natural gas dependence on other countries reached 45.3% in 2018. Many Chinese people are very concerned about being too highly dependent on foreign countries. However, it can be argued that there are four explanations for this figure. First of all, in terms of resource endowment, this trend is inevitable. Second, China has the capacity to import and pay. In 2017, China imported 33 billion US dollars of natural gas and artificial gas, accounting for 1.8% of its total imports, a situation that has huge potential for improvement. Thirdly, China needs import diversification. At present, 40% of China's imports are from Central Asia, 25% are from Australia, and there also imports from Russia. The imports sources need remain stable. Fourthly, we need to encourage Chinese energy companies to go global by cooperating with world-class enterprises, developing energy resources jointly, and exporting them back to China. This will not only stabilise our market sources, but will also reduce price fluctuations, so as to achieve mutual benefit and win-win results.
China’s LNG market will become the largest LNG market of its kind in the world, which will be both open and competitive. Since according to the rules of the market economy, consumers can shop around to find the lowest price, and use price and quality as the standards of measurement, there is no substitute relationship. Of course, the China-US trade war will artificially raise the price of China’s imports of LNG from the United States, distorting the relationship between supply and demand in the market. As the world’s largest buyer, China deserves high quality products at a reasonable price; moreover, it needs to play a role in stabilising the world natural gas market price.