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Replacing Europe

Emanuele Scimia
April 14, 2014

In case of a showdown over Ukraine, Russia aims at replacing Europe with China to sell its huge reserves of oil and gas, but Beijing is open to energy collaboration with the Kremlin only on its own terms.

Korrespondent Emanuele Scimia
Image: Emanuele Scimia

Western powers and Russia keep on skirmishing over Ukraine, and China is weighing its options in case of this war of attrition results in an energy dispute between the Kremlin and Europe.

After Moscow's annexation of Crimea, a narrative that Russia could offset reduced demand of oil and gas from the Old Continent with export to Asia is brewing, accompanied by concurrent remarks that the Chinese leadership might take advantage of the Russian need to reorient its energy sales should the European countries try to curb their reliance on commodities flowing from the former Soviet Union.

The question is whether Russian President Vladimir Putin will succeed in diverting from Europe to China 130 billion cubic meters (bcm) of gas annually. Russia covered 1.2 percent of China's gas import in 2012, according to the BP Statistical Review. In a memorandum of agreement signed in Moscow last year, China and Russia estimate that annual deliveries of Russian gas will touch upon 38 bcm from 2018 on.

It is since 2006 that Beijing and Moscow have been negotiating a gas deal in vain. China National Petroleum Corporation (CNPC) and Russia's Gazprom still have not agreed on tariffs and supply routes. The last deadline missed was on January 31, after China reiterated that it had no intention to pay the rates that Moscow was applying to European buyers.

With regard to oil trade, in 2013 the two countries reached an arrangement whereby China would buy more than 355 billion USD of Russian crude in the foreseeable future. Russia's oil giant Rosneft would let CNPC explore three offshore Arctic blocks in exchange - Russia accounted for nine percent of Beijing's crude imports in 2013, US Energy Information Administration shows.

It is probable that Moscow and Beijing are going to speed up negotiations on the long-delayed gas deal, with the Chinese government ready to capitalize on the Kremlin's present weak bargaining power to gain discounted prices, but the Middle Kingdom will make every effort to avert a lethal embrace with its energy-rich neighbor.

Europe's dependence on Russian gas - not least via Ukraine's territory - is a stark reminder that exposure to potential cuts of supplies by Moscow is a tangible danger for China. To minimize its energy security risk, closer relations with Russia should be counterbalanced by both a more diversified energy basket and a variety of suppliers and relative transit routes.

Coal and renewable energy

"Energy independence means political independence," Paolo Scaroni, the outgoing chief executive of Italy's ENI, was quoted as saying by the Italian daily Corriere della Sera on March 25. By applying this concept to the case of Sino-Russian ties, Scaroni pointed out that China preferred to burn domestic coal - with a high level of pollution - rather than buying more oil and gas from Russia, so as to protect its geopolitical autonomy.

At most, Beijing is turning to renewable energy to tackle pollution from coal combustion. The Chinese government indeed aims at adding 49 gigawatts of renewable-energy capacity in 2014, the Chinese National Energy Administration stated on January 8.

In addition to developing a more efficient use of coal and its shale gas resources, China is set to become the world's biggest solar market ahead of Germany by installing roughly 5.40 gigawatts of photovoltaic panels by the end of 2014, Bloomberg News Energy Finance reported late last year.

Geopolitics of transit routes

Beijing's engagement to open oil and gas links across Asia is a cornerstone of its foreign policy. China's search for new energy sources and transit passages is relevant for the government of Chinese President Xi Jinping to such an extent that it is planning massive investments even in troubled regions, where transport and trade are constantly at risk.

The first target of China's geopolitics of pipelines is Central Asia. In spite of persistent regional instability, Beijing is poised to build the fourth branch of China's Central Asia Gas Pipeline (CAGP).

Ushered in late 2009, CAGP delivers Turkmen gas to China via Uzbekistan and Kazakhstan. The new strand of this Central Asian gas pipeline will run through Tajikistan and Kyrgyzstan, outflanking the Kazakh territory, cross-border tensions between these two former Soviet republics notwithstanding.

The enhanced version of CAGP is expected to carry 80 bcm of gas per year by 2020, representing over 40 percent of Beijing's imports in this sector, Radio Free Asia wrote on March 24, citing data from CNPC.

Shifting from north to south, China is also looking to the Indian Ocean to diversify its energy partners. In October 2013, a conduit capable of piping 12 bcm of gas each year from Myanmar's west coast to China's southwest region went online. A parallel oil link that is purported to pump 440,000 barrels of oil a day to China should go into operation by next June.

While Beijing decreases its energy vulnerability with these new transit routes, as vessels transporting oil and gas from Africa and the Middle East can circumvent the Malacca Strait chokepoint, it will concurrently struggle to protect its investments in the country once known as Burma, where ethnic conflicts are common and sweep through areas crossed by the two pipelines.

Pakistan's Gwadar

The Arabian Sea is yet another pivot of China's complex energy framework. During a meeting in Beijing with Pakistan's officials on February 19, China agreed to finance infrastructure projects worth 900 million USD in the Pakistani port of Gwadar. These funds are part of a Chinese plan to channel 12 billion USD into an economic corridor, comprising a 2,000 kilometer-long road link and a parallel railway, which would connect the unstable southwestern Pakistani province of Balochistan with China's Xinjiang region through the Karakoram mountain range.

The Chinese government's energy investments in volatile nations are risky but they contribute to alleviate its dependence on commodities imports from Russia and the Middle East while allowing Beijing to expand its clout in the regions involved. Central Asia is paradigmatic in this sense, given that its geography could provide China with strategic depth if it were to face a maritime encirclement in the future.

Emanuele Scimia is a journalist and geopolitical analyst based in Italy.

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