February 18, 2009

An energy pact signed yesterday moves Russia-China cooperation beyond SCO military exercises.  The deal helps China reduce its dependency on Middle Eastern oil and offers Russia the opportunity to fundamentally change its energy export policy.  Europe should be watching with an introspective eye.

According to the WSJ, the China Development Bank will lend $25 billion to Russian state-owned Rosneft and Transneft, respectively the country's largest oil producer and its pipeline operator.  In return, Beijing will receive an extra 15 million metric tons of oil annually for the next 20 years:

[The] supply deal – which represents about 300,000 barrels a day, or nearly 10% of China's current volume of oil imports – is to last 20 years, one person familiar with the deal said.  Details on the credit facility and the price China will pay for the oil weren't disclosed.

China Development, a government-controlled lender that has been the major source of financing for China's resources push, declined to comment.  The official Xinhua news agency said China and Russia signed pacts Tuesday, including a long-term oil-trading deal and a "finance scheme" involving China Development.  It didn't specify the amount of financing.

Over the last several years, a large-scale energy deal between Moscow and Beijing has managed to fall through the cracks.  China sought greater quantities of non-Middle Eastern oil, due both to the instability of the region as well as to the heavily pirated Strait of Malacca through which Chinese tankers travel.  However, Russia did not develop a pipeline to China while Western European demand remained high, so a deal was never reached.

Now, the situation is more than a little different.  In 2008, Russia's crude oil output fell for the first time in a decade, and its oil exports to China dropped almost 20 percent from 2007.  After China's banks managed to largely avoid biting the sub-prime bait, Beijing is taking advantage of its extra capital to make some major natural resources gains.  It is reported that part of the $25 billion will go toward building a Siberia-to-China pipeline, which will supplement the oil Russia presently transits to China by rail via Mongolia.

Russia has a real opportunity to reform its energy export policies and reduce its interdependence on European demand.  China's economy will be one the few that continues to healthily grow in the next couple of years, and unlike the EU's talk of downscaling dependence on Moscow, Beijing is actively seeking to increase its Russian oil imports.  A well-functioning pipeline network supplying China would be of economic and strategic benefit to Russia.

As such, this news ought to be a catalyst for European action of the kind that was called for after January's gas crisis.  If the EU has not reduced it energy dependence on Russia by the time a pipeline to China is built, a new gas pricing dispute could last longer than a few weeks.  Such a scenario might not be a waiting game where Moscow sacrifices a few weeks of exports to make a point, but rather one where Europe truly is left in the cold while Moscow offsets its gas losses with oil sales elsewhere.

The deal, notably, was signed in Beijing.

Peter Cassata is associate editor of the Atlantic Council.  

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