Interconnected ironies

May 5, 2014
New international responses to expansionism by Russia and China, coupled with an interestingly timed pipeline announcement, highlight the often ironic interconnectedness of modern energy relations.

New international responses to expansionism by Russia and China, coupled with an interestingly timed pipeline announcement, highlight the often ironic interconnectedness of modern energy relations.

As the European Union and the US tightened sanctions on associates of Russian President Vladimir Putin, US President Barack Obama and Philippines President Benigno Aquino III signed an agreement to position American warplanes in the island nation for the first time in 22 years. Obama fooled no one when he called the move unrelated to China, which has commandeered islands in the South China Sea claimed by the Philippines and other countries, including Japan. EU sanctions, meanwhile, lost potency when OMV of Austria and Gazprom of Russia announced an agreement to extend the South Stream gas pipeline from Bulgaria to Austria.

Russia and Ukraine

The pipeline will move Russian natural gas to Europe without transiting restive Ukraine. That the Kremlin soon might control more of Ukraine than it already does, having reclaimed Crimea by infiltration, raises the prospect for relaxation of the Russian craving for an alternate route but not of international scorn underlying the sanctions. Russia's bullying of Ukraine has toughened European Union resistance to South Stream, at least officially. At the practical level, accommodation by Austria and, before it, Bulgaria make the EU stance appear wobbly. For now, Russia's push for South Stream shows it wants to bypass Ukraine at least as strongly as Europe wants to cut dependency on Russian gas.

Russia also wants to lower dependency on European hydrocarbon markets and is driving eastward. For the past year, Putin has pressed development of Gazprom's ambitious Eastern Gas Program, which will connect giant fields in East Siberia and the Russia Far East with Sakhalin Island, where an LNG plant that started up in 2009 is to be expanded. The route of the program's trunk pipeline skirts northern China and could accommodate sales to Russia's southern neighbor. So far, the countries haven't agreed on price. China has been expanding its west-to-east pipeline system and can use supplies from Turkmenistan and elsewhere in Central Asia in negotiations with Russia over gas.

With oil, the Chinese position vis-à-vis Russia is weaker. The country's requirements are growing rapidly, and most Chinese tanker-borne imports arrive by way of the insecure Hormuz and Malacca straits. While Transneft was building the East Siberia-Pacific Ocean crude line, China lobbied hard to buy more than the 300,000 b/d delivered via a spur linked to the ESPO line at Skovorodino. Until last year, Rosneft, which owns the oil, resisted the Chinese bids, wanting ESPO crude to become an international marker. Then the Russian company agreed to sell at least 325,000 b/d more oil to China from the Pacific terminal at Kozmino. Part of the reason for the change was Rosneft's immediate financial needs. But the move was at least as much strategic as it was economic—with eastern alliance based on hydrocarbons at the center of Russian thinking. Russia soon might be selling China 1 million b/d of ESPO crude.

Persian Gulf security

Much of that oil originally was to flow to countries lately fearful of Chinese territorial ambitions. Aggravating those anxieties is a build-up of China's navy, motivated largely by the need it senses to defend tanker movements as far away as the Middle East. For now, the job of ensuring Persian Gulf security stays with the increasingly reluctant US. That means Beijing must rely on American resolve subject to question under Washington, DC's announced "pivot" to Asia, even as it buys as much Russian oil as it can—and gas, too, eventually.

In the Philippines, Obama showed the US at least will confront China in defense of Asian stability. Someday, it might have to defend China against Middle Eastern instability, important centers of which receive Russian support. That the US, wary as it has become of fossil energy and global messiness, can't elude these entanglements, all involving hydrocarbons, might be the biggest irony of all.