In the wake of another new wave of sanctions against Russia’s energy, financial and defense sectors in September, Russia’s response is to ratchet up its talks with China.
Aside from the fact that some say that the new sanctions won’t have an immediate or even near-term impact on Russia’s oil and gas industry—and therefore are pointless—the unfortunate reality is that China isn’t playing ball with the US and other world powers when it comes to Russia.
With an eager eye on Russia’s natural gas, China is the only member of the United Nations Security Council to abstain from censuring Russia. Rather than join the economic “war” between Russia and the US/EU, China is seeking to use it to its advantage to meet its own goal of increasing use of natural gas over coal to help lower greenhouse gas emissions.
China consumed more than 161Bcm of natural gas last year, importing about a third of it. It hopes to increase natural gas consumption to 420Bcm by 2020. Negotiations are currently underway for 30Bcm of natural gas from Russia to China over 30 years.
The negotiations are a clear reminder that Europe is not Russia’s only export customer and sanctions can go only so far when other nations are willing to continue working with Russia.
The export contract between Russia and China is targeted for finalization in November. In the meantime, Russia’s suffering is real.
Russia’s conventional resources are on the decline, but the country’s reliance on its oil and gas exports has been on the rise, accounting for two-thirds of all exports and 50% of the government’s budget by 2012.
By some estimates, each drop of one dollar in the price of Russian crude oil translates to about $1.4 billion in lost revenue, and the price has been dropping—tumbling to less than $97/bbl in mid-August and just over $95/bbl in mid-September.
So far, the escalating tensions in the Middle East have not buoyed prices, and the economic damage is already being done.
So, Russia’s potential deal with China makes perfect sense for Russia, especially with its conventional resources – which account for 90% of current production – on the decline.
This is where the newest US sanctions may prove most painful for Russia. Russia needs US technologies and expertise to access its own unconventional and offshore reserves, but under the new sanctions, and similar sanctions enacted by the European Union, the provision, exportation or re-exportation of such technology to Russia is prohibited.
China is no further ahead than Russia in development of and experience with the new technologies and methods required for extracting unconventional resources, so these sanctions put a definite dent in any plans Russia may have for replicating an American-style boom in unconventional. The sanctions also hurt Russia’s ability to attract investment dollars and other financing—to the tune of $500 billion in direct investment and as much as $65 billion in lost budget revenue, according to Merrill Lynch.
Efforts in the US to increase its own oil and gas production and clear the way for both crude and natural gas exports are no help to Russia, either.
The US has increased oil production over the last five years by roughly 3MMb/d, putting it on track to surpass Saudi American oil output by 2017. The US also recently surpassed Russia as the world’s top natural gas producer. If ExxonMobil is correct in its projection that natural gas will become the second most common energy source by 2025, the American shale boom could inflict even greater pain on Russia by causing oil exports to plummet by 25% after 2015.
US unconventionals can certainly help to increase the downward pressure on Russian and global markets. If the US government finally lifts the ban on exports of crude oil, the resulting increases in investment will drive further increases in production.
The US can also put pressure on Russia by speeding approvals of LNG export terminals and approving the Keystone XL pipeline. Pumping 830,000b/d of crude oil from the Canadian oil sands to Gulf Coast refineries, the Keystone can help the US further reduce its dependence on imports of oil from more volatile regions and free up more US oil and gas for export.
Exports offer the US government a politically expedient tool to help reduce Russia’s leverage on Europe and Ukraine without aggressive action that could further entangle America in a nasty foreign dispute.
Europe is also looking at a golden opportunity: while low oil prices and economic sanctions are slowing new Russian oil projects, Europe can free itself of its dependence on Russian oil and gas by exploiting its own shale resources and increasing imports from other, friendlier, nations.
And, it may be forced to do so, given China’s probable new status as a competitor for Russian oil and gas. The Congressional Research Service expects Europe’s natural gas consumption to grow as its domestic production declines. This has created a heavy reliance on Russian energy, especially in Eastern Europe. About 34% of Europe’s natural gas came from Russia in 2012.
Between 60-80% of Russian gas bound for Europe goes through Ukraine. Russia previously restricted the energy flowing through Ukrainian pipelines for political gain – in 2009, 2008 and 2006 — and surely won’t hesitate to play favorites with China in the picture.
The American shale oil and gas boom was the spark that started the rest of the world on a path toward creating a new global energy map. Don’t be surprised to see Russia doing everything it can to retain its iron grip on a huge chunk of that map.
Written by: Chris Faulkner, author of The Fracking Truth and producer of Breaking Free. He is also the CEO of Dallas-based Breitling Energy Corporation (OTC: BECC), an oil and natural gas exploration and production company. Mr. Faulkner’s diverse and extensive background in the oil and gas industry in North America, Europe and the Middle East covers all aspects of oil and gas operations, including project management, production, facilities, drilling and business development. Mr. Faulkner serves as an advisor to the ECF Asia Shale Committee and sits on the Board of Directors for the North Texas Commission.