The People's Republic of China-European Union-Russian Energy Security Triangle
Given its relatively low greenhouse gas emissions profile, some have coined natural gas a "blue fuel," as it is seen as a more environmentally-consciousness option than coal or oil. When compared to coal or oil, the Energy Information Agency (EIA) claims natural gas is only 55 percent of the carbon intensity of coal and 75 percent that of petroleum. (1) The International Energy Agency (IEA) estimates that global natural gas consumption will account for more than a quarter of total energy demand by 2035. (2) As of 2014, the IEA estimates that natural gas comprises 21 percent of the global primary energy mix at 3,500 billion cubic meters (BCM). (3) To obtain natural gas producers drill it from subterranean reservoirs, treat it onsite or nearby to remove impurities and differentiate types of gases, and then transport it to a consumption market. Large diameter trunk pipelines remain ubiquitous, yet in some instances, natural gas producers transport it through its liquefaction. Natural gas is liquefied by lowering the temperature to below -260 Fahrenheit and it can then be transported in bulk liquid form, which is then regasified at the destination market by bringing it above the aforementioned temperature for pipeline transportation.
Much of the demand for natural gas is satisfied from individual domestic production, yet Russia remains the largest exporter, a factor that influences marginal demand reliance. While total reserves change over time as fields are exhausted and new fields are discovered, Russia consistently ranks as having the largest reserve levels, with nearly a quarter of known global reserves. (4) This translates into Russia remaining a key player in cleaner energy production.
Russia faces a host of geopolitical and security conflicts because of direct and indirect military action in Ukraine and Syria. Yet, despite these ongoing geopolitical and security conflicts, it remains a dominant player in the world's natural gas markets. However, Russian cheap natural gas supply is finite and decreasing, while their customers' demand is increasing, shockingly, without a distinctly correlative price increase. The European Union (EU) demand for Russian natural gas presents a complicated picture. Individually, an increasing number of European countries are reducing their absolute and relative import volumes of Russian natural gas. However, due to a select group of countries rapidly increasing their import volumes, on average Europe has more Russian natural gas competing in their markets. (5) China, too, is seeking to increase their import quantities of Russian natural gas through the construction of multiple pipelines and joint ventures in Liquefied Natural Gas (LNG). China has lent over 12 billion USD to companies in Russia through the Yamal LNG project, ran by privately owned, yet government-friendly, Novatek. Chinese leaders accurately believe this is essential in their efforts to reduce energy costs in their manufacturing sector. Furthermore, Russian natural gas will play a key role in China's efforts to curb greenhouse gas (GHG) emissions by transitioning from coal to natural gas. This creates an intriguing energy security triangle, as EU and Chinese demand-side competition for Russian natural gas are a factor impacting the EU's price elasticity of demand for Chinese manufactured goods.
This paper will seek to explain the energy security dynamics between three major actors in the global energy trade. Often times, studies and articles discuss only the bilateral aspect, whether it is the EU-China trade dynamics, Russia-China or Russia-EU supply dynamics. However, by viewing this as a triangle, this paper will seek to explain how these three dynamics influence one another.
Gazprom is Russia's state owned energy company with the vast majority of the country's reserves, production, and preferential rights to explore potential new fields. Gazprom production in 2014 experienced the largest decrease in post-Soviet history, nearly 9 percent, and mostly from their Urals fields. Indeed, much of this is due to a 34.75 BCM drop in consumption from the previous year. Of this, 84.3 percent was from the combined drop in demand from the domestic market, the Czech Republic, and the Ukraine. (6) The drop in demand from the latter two countries was due to geopolitical conflict, as Russia attempted to control their respective abilities to counter Russia in Europe. Ukraine, specifically, has experienced both direct (Crimean invasion) and indirect (proxy groups in Eastern Ukraine) military aggression. Yet, the drop in the domestic electricity market may have been a market reaction to rumors circulating about rate increases by the Federal Tariff Service. This leaves approximately a 7-10 BCM decline, attributable to field decline rates in the Urals in 2014, with later years not likely to differ. This decline revealed Russia's inability to shift sales to new countries, due to the inflexibility of pipelines to supply countries with which they are not connected. These supply relationships were established decades ago and have continued uninterrupted for the majority of their time in operation. New relationships have typically been initiated by the interested purchasers, but as traditional demand markets dry up this may force Russia to approach potential buyers. To some extent, this has already happened as Gazprom has begun auctioning small volumes of their natural gas on the open markets in Europe. (7) Such efforts are more likely designed to achieve a minimum perceived standard of fair market competition to alleviate European Commission pressures against further utilization of the Nord Stream route. Such inflexibility to put more natural gas on the open markets is likely due to their emphasis on complicated long-term supply contracts and limited liquefaction capacity. Despite this, Gazprom has been emphasizing investment in the East Siberian fields of Chayandinskoye and Kovyktinskoye, preparing for Chinese investment. Declining field rates in the Urals are likely due not only to aging gas producing infrastructure but also underinvestment. Gazprom's absolute decline is similarly due to underinvestment in exploration and production of greenfields. (8)
Due to sudden shifts in export market demand, as of 2015 Russia may have had in excess of 40 BCM of swing production if Ukraine was cut off entirely from the Russian supply. This swing capacity is likely to further delay investment into new fields. In the...