The September 2 launch of the "Power of Siberia" pipeline, delivering natural gas from Russia to China, was highlighted on media worldwide. This US$55 billion project is the biggest energy project since the collapse of the Soviet Union. However its significance goes far beyond. A Wall Street Journal article has pointed out that by physically connecting the two world powers that have separately challenged the US, this project has altered the geopolitical configuration of the world.
This mega project has gone through twists and turns. Russia initiated, proposing the project to China in the early 1990s. However China was not keen about it at that time as the country did not need imported energy.
The decline of the demand and the price for natural gas worldwide as a result of the global financial crisis in 2008 could have been an opportunity to advance this project. However at that time no breakthrough was made in the negotiations, mainly due to differences concerning the price.
The situation started to change as China's consumption of natural gas soared. By 2014, China's consumption of natural gas exceeded the domestic supply by 46.1 billion cubic meters. China imported 59.5 billion cubic meters of natural gas that year.
By this time depending on foreign natural gas for 32% of its supply, China urgently sought to secure Russian gas. However Russia was now unwilling to sell to China, mainly because surging oil price internationally. It made better sense to devote more of its resources to satisfying the global market, and shipping natural gas to China was not considered a priority.
Russia's annexation of Crimea in early 2014 was the turning point. Russia, now politically isolated and economically sanctioned by the West, urgently sought a breakthrough by building a close relationship with China. It was only logical that the supply of natural gas to China should became a priority.
In addition, the breakthrough in the technology of extracting shale oil and gas in the US, which has made the US a major player in the global supply of LNG, has put pressure on Russia.
China and Russia signed the contract on "Power of Siberia" project in May, 2014. It was a win-win outcome for both parties, with mutually acceptable prices. The deal has secured Russia a major and stable source of revenue. China has achieved its goal of diversifying its gas supply. More importantly, the project has reinforced mutual interests and trust between the two countries.
The US became a net exporter of natural gas at the end of 2016 and China's importation of natural gas from the US jumped from 490 million cubic meters in 2016 to 2.92 billion cubic meters in 2017, an six-fold increase. However the export of US natural gas to China stopped as a result of the escalation of the trade war. A tariff was imposed: 10% initially, increased to 25% in May, 2019.
In 2018, China's natural gas intake increased by 31.9% and its dependence on the foreign supply of natural gas rose to 45.3%. China now imports natural gas from 19 countries. Australia and Qatar are the top two countries supplying natural gas to China, accounting for two-thirds of that nation's total LNG imports.
The retreat from the Chinese market, which is expected to have a 35% share of the global LNG market by 2025, has placed the US in an awkward position in terms of its LNG exports. US natural gas production increased by 16% in the first half of this year, a record high; the US's LNG export capacity grew by 54% from 2017 to 2018. While US production of natural gas is rapidly rising, it is quite difficult for the US to find an alternative market as large as China for its LNG.
It is obvious that the US has played a major role in pushing China and Russia closer, not only in terms of the natural gas business but also geopolitically. One commentator from Taiwan has said that while it's proven the US is always masterful in its tactics, it has been very clumsy on the strategic level.
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