China Is Quietly Profiting From the Russia-Ukraine Standoff: Here's How

Chinese President Xi Jinping is smiling because he's about to fleece Russia with a new gas deal. (Source: Asianews.it.)

Much to the chagrin of the United States, China has the innate ability to negotiate major energy deals in the midst of conflict. PetroChina's (NYSE: PTR  ) state-run parent company, China National Petroleum, or CNPC, was the first oil company to secure a contract in the Iraqi oil fields following the fall of Saddam Hussein, and today both it and CNOOC (NYSE: CEO  ) are two of the most active oil comapnies there. With Russia and the West at a standstill over the recent events in Ukraine, it appears that CNPC is about to seal another energy coup. Let's look at this deal and what it means for the future of energy around the world. 

The high price of economic growth
China is the most energy-hungry country in the world. Last year it passed the U.S. as the largest oil importer, and it imports over 40% of its natural gas. This sort of energy bill can get expensive, especially since so much of the price of natural gas is indexed to oil versus being bought at market prices, like here in the United States. PetroChina, which imports over two-thirds of China's natural gas, pays about $13.60 per thousand cubic feet for natural gas. This is more than double the current spot price in the United States, which itself is at a four-year high. 

Trying to fuel the world's second largest economy with energy bills this expensive is getting prohibitive, so it's no wonder that these companies will jump at any opportunity to sign a deal that could potentially lower imported energy costs.

Enter the standoff between Russia and the West
The escalating standoff between Russia and Ukraine is making both sides a little apprehensive. Russia is far and away the largest supplier of natural gas to Europe, and the pipelines that run through Ukraine are responsible for 34% of all imports. Europe wants to diversify its energy sources exactly because of events such as the ones in Urkaine. For Russia, it will be even harder to find a client as large as Europe. It is the destination for 65% of Russian natural gas exports, and any disruption of that flow could put a pretty big hole in the Russian budget. The most logical step for Russia is to send its gas East, and what better customer than China?

This Russia-China gas deal has been in the works for over 10 years, and every time neither side has come to an agreement on price. PetroChina has firmly held that it will not pay more than what Europe pays for gas -- about $10.50 per million BTU. Russia's Gazprom, the nation's largest natural gas company and the only one with export pipelines, says that the development of the Siberian fields as well as the $22 billion to construct a pipeline between the two nations would require natural gas prices above $13.50 per million BTU to make it financially feasible. 

Today, though, Russian officials have stated that a deal will be in place when President Vladimir Putin visits China in May, which probably means that Russia will bend to Chinese demands. Also, negotiations are taking place to develop alternative-energy projects in Crimea, less than a month since Russia had annexed the region. All of this is happening even after China bought agricultural land in eastern Ukraine roughly the size of Massachusetts last year.

What a Fool believes
For the United States, moves like the ones China has made are rather frustrating -- not because they secure natural resources, but because they undermine foreign policy. If Russia sings both a gas deal and an alternative-energy development project in Crimea, it both eases the pain in the event of tighter sanctions on Russia's energy market and tends to give further legitimacy to Russia's new claim on the Crimean peninsula. From China's perspective, though, this is just good business. By swooping in during times of conflict, China is able to secure contracts for oil and gas resources for much less than at other times. As long as China needs natural resources, expect more opportunistic deals like this to happen in the future. 

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  • Report this Comment On April 20, 2014, at 2:09 PM, lighthouse333 wrote:

    As soon as China become strong and capable, he will take over Russia like he took over many small nations and tribes around him. Just look at his size, all the lands he claimed that his, were belong to thousands of small nations and tribes that China had been taken for the last 6000 years.

    Just ask Vietnam, Japan, Philippines, Malaysia, Korea, Indonesia, and the rest... in that South Asia... They will tell you who China truly is.

    A bully invader, a thug, a mob, a thief and a murder.

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