China and Russia Develop the Far East Gas Route (May 2023)

The world's geopolitical landscape is constantly evolving, and the relationship between China, Russia, and the United States is no exception. In recent years, there has been an increasing trend of cooperation between Russia and China, particularly in the energy sector. On January 31, 2023, Russia and China signed an intergovernmental agreement on pipeline gas supplies via the "Far Eastern Route," marking a significant step forward in their energy cooperation. This agreement defines the critical parameters of the 10 billion cubic meters per year gas supply contract signed between Russia's Gazprom and China National Petroleum Corp (CNPC) in 2022. It gives Gazprom exclusive rights to supply gas to China via the cross-border section of the Far Eastern Route. The Far Eastern Route contract is essential because it is part of Russia's efforts to expand its gas exports to Asia, which have become increasingly vital after Russia invaded Ukraine in 2022, which led to international sanctions and the loss of most of its pipeline gas exports to Europe. China remains central to Gazprom's diversification efforts, and the agreement cements the energy cooperation between the two nations. This contract is the second gas supply deal between Russia and China, following the 38 Bcm/yr Power of Siberia contract signed in 2014, which started supplies in late 2019. Russia and China are also committed to using their national currencies for payments under the agreement, indicating a deeper level of cooperation between the two countries.

Gazprom is looking for ways to increase domestic gas consumption and find new markets in Asia, including Central Asia. The company is also keen on continuing to export pipeline gas to Europe via a proposed gas hub in Turkey, which is planned to be discussed at a summit in Istanbul. However, the meeting has been postponed until the second half of March due to the recent earthquake in Turkey and Syria. Russia had initially proposed the idea of the gas hub but has yet to agree with Turkey on the fundamental pricing principles. Turkey has offered to use its energy exchange, Epias, as the hub's sales platform. At the same time, Russia prefers to sell the gas on the Turkish-Bulgarian border through its own Electronic Sales Platform (ESP). However, ESP trade may be less attractive to European buyers due to the political toxicity of Russian pipeline gas in the EU. The St. Petersburg International Mercantile Exchange (Spimex) is understood to be interested in the gas hub project. It may offer its exchange technology to improve Russia's role in the project. Meanwhile, Turkey is negotiating discounts and deferred payments with Gazprom and could use the gas hub uncertainty as leverage to secure a better price.

Russia has actively been looking to diversify its exports, and opportunities in Turkey and Asia have proven to be potential solutions and options. Restrictions on Russia's oil trade significantly impact the global energy market and Russia's economy. Last year, Russia managed to redirect its oil exports to Asia, increase its oil output by 2%, and boost oil export earnings by 20% to $218 billion. However, the recent sanctions on Russia's oil sector, including an embargo on most sales to Europe and a Group of 7 nations' price cap on Russian crude, are beginning to affect Russia's energy earnings. The trend is continuing, with the Russian government's revenue from oil and gas production and exports falling by 46% in January compared to the previous month. The gap between the prices of Brent, a global oil benchmark, and the Urals, the primary type of exported Russian crude, has also widened to about $40 per barrel in January, indicating a drop in Russia's oil revenues.

In conclusion, the energy relationships between various global stakeholders continue to alter the relationships between China, Russia, and Europe. Opportunities in Turkey, Asia, and Europe will continue to assist Russia in diversifying its exports while also avoiding sanctions and geopolitical pressures due to the war in Ukraine. Although the future is uncertain, it is clear that China and Russia will work together to help sell Russian energy exports throughout the world without concerns about US sanctions.