Russia: Exploring Energy Markets in East Asia?

07 Apr, 2014    ·   4376

Vivek Mishra analyses the need for Russia to switch its energy exports clientele from the West to the East

Vivek Mishra
Vivek Mishra
Research Intern
The recent proposal by Britain for a discussion paper on ending reliance on Russian energy supplies appears two pronged, with both long and short term options. In the longer term, ensuring energy security for the 28-nation EU and ending Ukraine’s energy reliance on Russia in the next 25 years seem to be the key focus; and according to the proposition, the latter is a subject that needs immediate focus. That, should Russia switch off its energy taps apropos the ongoing Crimean crisis.

Russia’s energy sector accounts for more than 50 per cent of its revenue. Until 2013, Russia – one of the world’s largest energy producers – accounted for approximately 130 billion cubic meters of energy supplies to Western Europe, making energy Moscow’s biggest hedging bait with the West. But with Europe mulling on strengthening their energy security to reduce dependence on Russian supplies and concomitantly ensure energy supplies for Ukraine, it will serve Russia’s interests if it moves its focus towards the East.

Russia has not exhibited signs of potentially wilting in the face of the recent Western sanctions. However, what are Russia’s options to offset the resultant energy supply limitations? Will Russia shift its energy focus to the East?

Likely implications of sanctions on Russia
The West’s increasing sanctions on Russia will most likely impact the latter’s energy exports to at least 18 west European countries and a few eastern ones, including Ukraine. Moscow’s intentions were made clear in a recent insinuation by the chief of Rosneft, Russia's biggest oil company, that if Europe and the US isolate Russia, it will look east for new businesses, energy deals, military contracts and political alliances.
In the event of an embargo on energy imports from Russia by its major clients in Western Europe and Ukraine, Russia will have to quickly replace its Western energy clientele. Given the energy-starved nature of India and China, geostrategically, it will suit Russia to shift its energy interests to the east.

India has been a traditional ally of Russia and runs an enormous energy-deficit. Besides, India faces the problem of payment on its import of Iranian oil, given the currency sanctions on the latter. China’s energy demand too is high and growing. Russia cannot afford to delay the shift of its energy exports from the West to the East. Already, Ukraine is believed to be working with global oil majors such as ExxonMobil, Chevron, Shell, Repsol and PetroChina to tap its energy resources. Once Ukraine achieves a relative degree of energy security, given the current crisis and the ensuing prognosis of their bilateral relations, it is likely that Ukraine will either ask Russia to remove its vast energy pipe skein or demand that Moscow pays through its nose.

Russia’s wariness also stems from the shale gas revolution that the US has promised will deliver. Once the US establishes itself as a credible exporter of shale gas, it will try to satiate energy demands emanating from both the Western and Eastern Europe. This will pressurise Russia to either reduce its gas prices or look for an Eastern clientele. It is hence in Russia’s interest to start looking for eastern options for energy exports. However it will be interesting to see if Russian’s increasing focus on the East will result in strategic grounds being ceded to the NATO that is also moving eastward – with the latest cooption being Ukraine.

Eastern Partners: China, India & South Korea
Russia may have already had an Eastern presence, but its recent efforts to push its Eastern energy-pivot are relatively new. Russia has been in talks with South Korea regarding an energy transmission line from Vladivostok to Seoul; and has been holding discussions with China and India to initiate energy cooperation in the supply of Liquefied Natural Gas (LNG).

The Sino-Russian energy ties have only expanded in the wake of recent energy deals. Novatek’s Yamal LNG project has allotted 78 per cent of its output to Asia. The China National Petroleum Corporation (CNPC) has agreed to purchase 20% of Novatek's Yamal LNG stake. Furthermore, Russia’s Gazprom is the process of signing a deal with the CNPC to supply gas through the Power of Siberia pipeline, later this year.

Additionally, both China and Russia find convergences in their opposition to the West.
During his visit to Moscow in 2013, Indian Prime Minister Manmohan Singh conveyed to his Russian counterpart that India’s energy major, Oil and Natural Gas Corporation of India, was interested in exploring offshore oil and gas in the Arctic, with Russian partners. Both sides also agreed to study the possibility of pumping oil and gas to India via a pipeline. However, if Russia decides to shift its energy focus export to the East, it will have to face major challenges. Constructing an energy pipeline to the India will have to face immense odds, whether through land or sea. India’s traditional alliance with Russia and its current pro-Russian stance on the Crimean crisis could help in coaxing Russia to extend its LNG supply routes to India.

This, of course, will require political will from both Moscow and New Delhi.