China, Russia Mull Mongolia Gas Route Amid Ukraine Crisis

A commentary by Michael Lelyveld
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xi-jinping-mongolia-china-diplomacy-aug-2014.jpg Chinese President Xi Jinping (2nd from L), Mongolian President Tsakhiagiin Elbegdorj (C), Chinese first lady Peng Liyuan (2nd from R) and Mongolian first lady Bolormaa Khajidsuren (R) attend a welcome ceremony at Ghengis Khan Square in Ulan Bator, Mongolia, Aug. 21, 2014.

The conflict in Ukraine has driven Russia and China to consider energy options that appeared far-fetched only a few months ago.

Russia's rift with the European Union has raised risks for Moscow in its main energy export market, spurring efforts to forge closer ties with China as an alternate revenue source.

The result is a push for pipeline projects that have languished for years.

Just four months after signing a U.S. $400-billion (2.4- trillion yuan) deal to supply gas to China through a 4,000- kilometer (2,485-mile) East Siberian pipeline, Russia is promoting plans for a second line from the west that officials say could be agreed upon soon.

At a ceremony marking the start of the eastern pipeline project in the Russian city of Yakutia on Sept. 1, President Vladimir Putin and Alexei Miller, CEO of state-owned Gazprom, voiced their readiness to develop the western route to Xinjiang, known as the Altai pipeline.

"If Gazprom works closely with CNPC (China National Petroleum Corp.)--and Gazprom is ready to do this--then we will be able to sign a contract during the meeting between our heads of state in the month of November," Miller said, according to Interfax.

Putin said the western project could be carried out "even more quickly" than the one in the east, while Chinese Vice Premier Zhang Gaoli noted that the route could tap more gas reserves from West Siberian fields.

Russia already faces a formidable task to build the eastern line, known as the Power of Siberia, by 2019. The estimated cost for construction on Russian territory is U.S. $21 billion (128 billion yuan).

Western pipeline

Since 2006, Russia has tried repeatedly to persuade China that the western route should come first, since East Siberian resources have yet to be developed.

China has resisted until now because its major markets are in the east, while Xinjiang is already well-supplied with import pipelines from Central Asia and its own gas.

But the Ukraine crisis and China's gas needs may have changed the calculations, giving the western route more appeal.

The threat of increasing sanctions has motivated Russia to renew its bid for a western pipeline deal as a source of financing from China.

China may also be showing more interest because the National Energy Administration (NEA) recently cut its forecast of gas production from shale formations in 2020 by more than half, making it harder to reach supply targets.

Under previous agreements, the eastern line would deliver 38 billion cubic meters (1.3 trillion cubic feet) of gas to China annually, while the western route would carry 30 billion cubic meters (1 trillion cubic feet) per year.

Last week at a meeting with Putin in Moscow, Miller raised the prospect of supplying higher volumes on the western route, saying that "the possibility of sending 60 billion-100 billion cubic meters (2.1trillion-3.5 trillion cubic feet) of gas is being considered," Interfax reported.

Crossing Mongolia

China and Russia are also considering a shift in the western route to cross Mongolia, which could overcome a major problem with the Altai plan.

Russia's Altai region offers only a narrow corridor on China's border of some 50 kilometers (31 miles) at high altitudes of the Ukok Plateau, an area designated by UNESCO as a World Heritage Site and conservation area.

Moscow has never been clear about how to address the limits on construction there.

In recent weeks, both Presidents Xi Jinping and Vladimir Putin have visited Ulan Bator to meet with Mongolian President Tsakhiagiin Elbegdorj. Xi's visit to Mongolia was the first by a Chinese president in 11 years.

In a joint declaration on Aug. 21, China supported Mongolia's call for a trilateral meeting with Russia, the official Xinhua news agency reported.

The first such meeting, which could be a prelude to a pipeline deal, took place on Sept. 11 at the Shanghai Cooperation Organization (SCO) summit in Dushanbe, capital of Tajikistan.

During a press conference with Putin on Sept. 3, Elbegdorj promoted "the advantages of building a gas pipeline across our country's territory," citing factors including "security, convenient short route and steppe conditions," Interfax said.

While the Ukraine crisis appears to have pushed the issue to the fore, the Mongolia route has been under discussion since last fall, Russian Natural Resources Minister Sergei Donskoi said.

Mongolia is likely to be in competition with Kazakhstan, which has also offered its territory as an alternative to the Altai route, although the country already carries three strands of China's Central Asia Gas Pipeline (CAGP) system from Turkmenistan.

With either choice, Russia and China would have to weigh the risks of an additional border crossing, a problem that is already on Moscow's mind because of its troubled history of gas transit to Europe through Ukraine.

"A mediator in transit creates additional problems," said senior analyst Alexander Kornilov at Russia's Alfa-Bank, cited by the Kremlin's RIA Novosti news service. "In any case, I would warn against additional mediators," he said.

From Beijing's standpoint, a Mongolia line may also raise trust issues, in part because of history dating back to the Mongol invasion of China and dynasties starting in the 13th century. In the modern era, Mongolia gained independence from China in 1911.

In recent years, Mongolia has leaned toward Russia, relying on imports of Russian fuel, although over half of its foreign trade is with China, reaching $6 billion last year, according to Xinhua. Trade with Russia amounted to $1.6 billion, Germany's Deutsche Welle said.

Mongolian attitudes toward China and its drive for resources are variously described as "wary" or distrustful.

A summary of bilateral relations by the official English-language China Daily in 2010 described ties as "normalized" after a period of "ups and downs."

During his visit, Xi sought to open a new chapter in relations, offering financing and access to Chinese ports for the landlocked country, which is facing a slowdown in investment and economic growth.

"Welcome aboard China's train of development!" Xi told Mongolian lawmakers.

Problems remain

But prospects for a pipeline may remain problematic.

Russia last shipped small volumes of crude oil to China through Mongolia over a secondary rail route in 2007 after lengthy tariff negotiations, only to find China reluctant to rely on the  transited supplies.

Mikkal Herberg, energy security research director for the Seattle-based National Bureau of Asian Research, said China's security concerns with cross-border transit seem to have eased since then because the country has developed multiple import sources and routes.

"From the Chinese perspective, they're feeling much more secure about the diversification of their gas pipeline routes and supplies, so it may mean that they might feel more comfortable about a Mongolian line," Herberg said.

Herberg noted that one of Beijing's biggest concerns with Russia's push for the western line first was that it would have allowed Gazprom to play demand in Europe against China to drive up gas prices, since both would be fed by the same resource base.

Now that China has a commitment for an eastern line from separate resources in Siberia, the threat of competition for supplies on the western route is less of a worry, he said.

Herberg argued that Putin has made major miscalculations in the Ukraine conflict, underestimating the cost of western sanctions to Russia's economy and its ability to develop energy resources in exchange for small or short-term gains.

"I call this picking up nickels in front of the steam roller," he said.

As sanctions curb western financing, Moscow has become increasingly reliant on deals with China after years of restricting its investment in the Russian energy sector.

On Sept. 1, Putin stunned observers by publicly offering China a stake in state-owned Rosneft's Vankor oilfield, long considered the jewel in the company's crown and a main source of high-quality crude.

"They're putting themselves in the position where they have to sell the family silver," said Herberg.

"They've thrown themselves into the arms of the Chinese and the tender mercies of the Chinese," he said.


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