Sino-Russian transregional gas cooperation: Key issues

Energy cooperation between Russia and China can have several positive effects for the region. First, energy cooperation will greatly increase Russia's foreign exchange earnings, improving the federal government's fiscal and budgetary positions and helping the recovery of the national economy at a faster pace. While East Siberia and Far East regions have been ignored for a long time, energy cooperation and the construction of pipelines across the region raises the possibility of job opportunities and economic prosperity to the local population; if realized, such prospects can reduce threats of political unrest in the region while providing the federal government with increased capability to deal with external concerns (i.e. territorial disputes with Japan). Second, energy cooperation will increase China's options for stable energy supply [Voloshin, Gerasimov, 2014]. Securing a supply of energy and maintaining market price at a relatively stable level will also help the legitimacy of China's Communist Party, as a popular survey has shown a correlation between living conditions of common people and popularity of the central government. Third, it is possible that Korea and Japan will participate in energy cooperation with Russia. This will help stabilize Northeast Asia while providing an opportunity for these countries to settle their territorial disputes with Russia. At the same time this will help Russia integrate into the regional economy and energy market that were not traditionally a part of Russia's grand plans. However, there is a risk that Russia could potentially dominate the regional energy market, and this could reduce stability if major regional players were placed in a position of conflict over energy, as Russia would be in a position to manipulate energy prices.

Research Limitations

Despite incentives that will promote energy cooperation between Russia and China, it is undeniable that several factors might impede energy cooperation in the near future. First, the positions of Russia and China in this arrangement are not equal. It is foreseeable that the international price of energy will remain at a relatively high level while China's energy demands for sustaining economic growth will not diminish; therefore, China might be forced to look to both Russia and OPEC members. China's continued energy demands will put Russia in an advantageous position. Russia as the seller and exporter has more options than China. The European Union has been Russia's largest energy importer, consuming more than 70 % of Russia's energy exports; the demand for energy in Europe, especially natural gas, most likely will not decline in the near future, even taking the Ukraine crisis into consideration, giving Russia the upper hand with China. Second, Russia's domestic environment might become an impediment to energy cooperation with China. Russia has been known for inconsistency in economic policy. While Russia is among the largest exporters of energy, FDI is not popular in some sectors. Foreign investment in the energy sector and other strategic industries is strictly prohibited by federal regulations.

At the same time, heavy tariffs and taxes are often imposed on foreign companies and investors. Local interest groups and various forms of influence can also play a significant role in Russia's economy. All these factors can influence Russia's cooperation with foreign countries including China.

For example, in the case of organizing exports of Russian natural gas, it is necessary to distinguish the following from major adverse factors [Steblyanskaya et al., 2017b]:

— The possibility of a decrease in growth rates of demand for natural gas in the foreign markets owing to climatic and/or economic changes that can lead to decrease in supply rates of the Russian gas for export;

— The possibility of a decrease in the share of the Russian gas in gas consumption in the European market, owing to aspiration of the European Union to diversify sources of gas;

— Substantial marketing risks in connection with high prices and other risks from global markets;

— Availability of competition by LNG delivered from other regions (Middle East, Australia, Indonesia, etc.);

— Possible competition between Russian energy suppliers;

— The high cost of development and transportation of Russian energy resources, requiring an appropriate level of export prices for return on investments; need to attract considerable investment for simultaneous implementation of several capital-intensive projects General Scheme of Development of Russian Gas industry for the period till 2030 // Ministry of En-ergy of the Russian Federation. The order of 06.06.2011 No. 213. URL: http://minenergo.gov.ru/ (accessed:..

Third, one important challenge is that China is giving preference to diversifying energy deliveries [Lazko, 2014]. Further, exports such as jet kerosene, fuel oil, diesel and gasoline soared and imports decreased. Net diesel exports for the first time for the last 30 years exceeded gasoline and fuel oil imports and have dropped to the lowest level in 13 years. LNG market continues to expand and China is now the world's largest LNG importer [Tian, 2015]. China's biggest LNG vendors are Australia (78 %) and Algeria (16.4 %). Nigeria, Oman, and Russia make up 2.05 %, 2.03 %, and 1,4 %, respectively. After 2017 Australia is able to transport 72 mln.t to the Pacific Rim market (80 % of this amount already under contract) [Razmanova et al., 2015]. North America could be the largest unconventional gas producer. The maximum export volume of American gas is estimated to be 50-60 billion cubic meters, and, according to experts, most will go to the Pacific Rim and other markets. The share of gas in the American energy balance is predicted to rise from 31 % to 38 % by 2040 [Zavalny, 2016]. However, many experts are quite conservative regarding estimates of future growth in shale oil production, due to existing uncertainty about actual shale reserves Global trends in oil and gas market to 2025. Lukoil, 2013. 64 p. URL: http://www.lukoil.be/pdf/trends_global_oil_eng.pdf (accessed: 09.01.2018).. Other global regions are only in initial stages of geological exploration, and this entails great uncertainty regarding the potential for shale gas production. It is assumed that aside from North America, shale gas production will be carried out only in Argentina, China, India, South Africa, Australia, and Europe, and will not exceed 70 bcm in total by 2040. At the same time, gas production from new traditional fields will become more high-tech, with development of deep-water fields, fields with more complex geological structures, and fields located in harsh climatic conditions [Global and Russian..., 2016].

Because Russia shares a border with China, it is easy to import gas from Russia by pipeline. However, China is a large country and large energy consumer, and China needs to diversify sources to decrease dependence on any one supplier [Kutler, Schwartz, 2014; Liu Yi Jun, 2014]. So, Russian gas exports to China are linked to substantial risks caused by a restraining factor price/demand for energy carriers, competition of the Russian pipeline gas and Middle East, Australian and Indonesian LNG, and the high cost of development and transportation of Russian hydrocarbons that requires appropriate price levels. According to the Russian Federation Energy Strategy, one of the main aims is to increase LNG production by 5 times (from 14 to 74 bln m cub.), and increasing LNG share in total gas exports to 23 % by 20 3 5 Energy Strategy of Russian Federation, President of Russian Federation Analitical Center. 1st Dep-uty Ministry of Energy of RF A. L. Teksler. Moscow, September 2015. URL: http://minenergo.gov.ru/system/download/1913/2406 (accessed: 09.01.2018).. The Pacific Rim is one of the main markets for LNG from Gazprom. In 2014 about 60 % of the total amount of Gazprom's LNG was delivered to this region Alexey Miller: Russia and China signed the biggest contract in the entire history of Gazprom // Gazprom. Media. News and events. 21.05.2014. URL: http://www.gazprom.com/press/news/2014/may/ article 191451/ (accessed: 09.01.2018); Gazprom delegation visits China // Gazprom. Media. News andevents. 08.12.2015. URL: http://www.gazprom.com/press/news/2015/december/article254716/ (accessed:.. Gazprom's LNG projects to the Asian region include: Sahalin-2 (operating plant) with 10 mln t, Vadivostok LPG (project) at 10 mln t, and Sahalin-2, line 3 (project) at 5 mln t. Another major gas project realized with participation by Chinese investors is the construction of an LNG plant located on the Yamal Peninsula, in Southern-Tambey field, that should have the capacity for 16.5 million tons of LNG per year. Russia proved probable shale gas reserves of 927 billion cubic meters. The contract provides delivery of 3 million tons of LNG per year within 20 years [Krukov, Tokarev, 2016].

Fourth, the main problem for Sino-China gas cooperation is a sharp decrease in world prices for hydrocarbons and uncertainty of their further dynamics Energy Strategy of Russian Federation, President of Russian Federation Analitical Center, 1st Dep-uty Ministry of Energy of RF A. L. Teksler. Moscow, September 2015. URL: http://minenergo.gov.ru/system/download/1913/2406 (accessed: 09.01. 2018).. It doesn't mean that China does not want to import more gas, but price matters. Gas in China is more expensive than many other energy sources, and energy price reform is key to helping increase gas consumption in China [Kutler, Schwartz, 2014]. Of course, the Asian market has the world's highest prices for LNG: in 2013 the average gas price in the Asian market was $570 per 1000 CBM, versus $380 in the European market [Voloshin, Gerasimov, 2014]. However, a competitive analysis of Russian natural gas in the foreign market showed that Russian pipeline gas supply in the long term will be competitive [Programme., 2007]. An analysis of Russian gas fields shows that there are available potential resources that can be produced at prices lower than $4 per mmbtu by 2040 [Global and Russian., 2016]. Russia Gas Export average price is $317 th. cub. M Statistical Data. Russian Federation Natural Resources // Energy ministry. Production, consump-tion and export oil and gas statistics. 2013, Jan. -- 2016, Sept. URL: http://minenergo.gov.ru/activity/statis-tic (accessed: 19.06.2018).. “Power of Siberia” contract gas price is $350.87 th.cub.m, but real imports of 38 bln.cub.m.per year could mean an expected price of $250-300 th. cub. m. For example, the price for the Turkmenistan gas pipeline is around $300-320 th. cub. m. In the medium-term, the close connection between gas prices and long-term contracts in the China market will persist.

Future research

It is plausible that both Russia and China will win due to dual cooperation. In Fig. 5 we can see a forecast by the Russian Academy of Sciences [Kuzyk, Titarenko, 2006] for the development of Russian and Chinese cumulative power, .

The “nine-parameter complex” considers the current situation and possible perspective scenarios for cooperation between the China and Russia to provide an overall assessment and forecast about the expansion of Russian-Chinese strategic interaction (Fig. 5). Categories for point totals are as follows: 8-10 points (superstate), 5-7 points (great power country), 2-4 points (regional power country), 1 (small country). Following this this model, the Russian Academy of Sciences drew the following conclusion: The optimal strategic choice for Russia for improvement of Russian-Chinese cooperation is a “best-practice” transition based on commercial trade and international relations of the two countries. The main positives of this choice are a long-awaited and powerful impulse to development of Siberia and the Far East, strengthening Russia in North-East Asia, and the Pacific Rim, and interaction of countries benefiting from globalization. Moreover, the development of energy cooperation would directly facilitate local economic development, transportation, and utilities in the regions. Further, energy cooperation between Russia

Fig. 5. Russia and China' cumulative power development forecast Source: Kuzyk B. N., Titarenko M. L.China -- Russia 2050: cooperation strategy. M.: Institute of economic strategy of RAS, 2006. P. 165-201.

and China would provide a useful example of useful transregional cooperation for other regional players [Kuzyk, Titarenko, 2006].

Further research would concern Energy Cooperation System Dynamics within the framework of transregional theory and interregional cooperation development. A number of factors affecting energy cooperation can be identified, factors classified in order of importance, and a forecast model built, showing which factor has the most impact on the future of Sino-Russia energy cooperation within the framework of international relations theory.

Discussion

Sino-Russia gas cooperation is stable according to distinctive features of stable systems of international relations,, such as a) interactions are not constantly in doubt; b) there is a consensus about rules of competition between these participants; and c) relations are characterized by moderation.

Building on Kuznetsov's transregional framework model and using the case of Sino- Russia transregional gas cooperation (Fig. 6), we proposed priorities for Russia-China transregional gas cooperation and the following functions of energy transregionalism: institution-building, skills development for gas cooperation, cooperation in gas technology and safety development, creating conditions for trade and economic cooperation in gas sector, stabilization, balancing, and rationalizing.

From the business perspective, it is estimated that China will surpass the United States in GDP between 2025 and 2030, and in 2040 China's share of global GDP could be 24 % [China Energy Outlook..., 2016; China Gas industry..., 2016] In this case it would be foolish to neglect potential economic and energy cooperation with China. Russia produces a surplus of gas, such that the next 30 years could be considered as “era of gas”. However, Russia is at risk to miss opportunities to export gas to China, due in part to price/ demand levels, high prices in the China market, competition from the Middle East and Australian and Indonesian LNG, and the high cost of development and transportation of the Russian hydrocarbons that requires an appropriate level of the prices. Nevertheless, we insist that Russia and China would both gain from dual cooperation.

Fig. 6. Sino-Russia Trans-regional gas cooperation scheme (using Kuznetsov's transregional model)

The main pluses of the choice “To be together” are providing a long- powerful impulse to development of Siberia and the Far East and real benefits from transregional cooperation.

Conclusion

China's gas security faces a severe challenge because limited gas resources cannot meet soaring demand. As a result, China may not be able to achieve its targets for diversified energy consumption and reducing carbon emissions under current energy policies. At the same time, energy production is the leading sector of the Russian economy. Energy cooperation between Russia and China has developed at an incredible pace. From a political perspective, energy cooperation between Russia and China is a result of stable trust and the diplomatic relationship between the two countries. Russia and China are neighbors, and it is logical to assume that neighbors might try to create mutually beneficial relations. Despite incentives to promote further energy cooperation between Russia and China, it is undeniable that several factors might impede energy cooperation in the near future. First, the positions of Russia and China in this arrangement are not equal: it is foreseeable that the international price of energy will remain at a relatively high level while China's energy needs for sustaining economic growth will not diminish; therefore, China might be forced to look to both Russia and OPEC to fulfill energy needs. Second, Russia's domestic environment may become an impediment to energy cooperation. While Russia is among the largest exporters of energy, she is not particularly fond of FDI in some sectors. Foreign investment in the energy sector and other strategic industries is strictly prohibited by federal regulations. At the same time, heavy tariffs and taxes are often imposed on foreign companies and investors. Local interest groups and various forms of influence can also play a significant role in Russia's economy. All these factors can influence Russia's cooperation with foreign countries, including China. Moreover, another important issue is that China also wishes to diversify its gas suppliers. Whether China will choose Russia to be its main supplier remains an important question. Nevertheless, China is replacing coal with gas. In Russian-Chinese projects that are already in operation, it is essential to support uninterrupted transportation of gas.

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