How Russia Diversifies & Expands Its Gas and Oil Supplies Despite Western Pressure

© Sputnik / Alexey Nikolsky / Go to the mediabankWelding at the connection ceremony of the first link of the Power of Siberia gas pipeline on the Namsky tract near the village of Us Khatyn in the presence of Russian President Vladimir Putin.
Welding at the connection ceremony of the first link of the Power of Siberia gas pipeline on the Namsky tract near the village of Us Khatyn in the presence of Russian President Vladimir Putin. - Sputnik International, 1920, 18.01.2023
Russia's natural gas supplies to China via the Power of Siberia pipeline jumped from 10.39 billion cubic meters (bcm) in 2021 to 15.5 bcm in 2022. Russia is planning to raise pipeline gas deliveries to China to 38 bcm annually by 2025. What message does this trend send to western sanctions designers?
"Russia learned the lesson of 2014 (the start of sanctions) better than the West," Christopher Weafer, the founding partner of Macro-Advisory Ltd, an independent macro consultancy, told Sputnik.
"While Brussels and Washington talked about energy supply risk diversification, Moscow actually did something about it with Power of Siberia 1, the ESPO pipeline and a focus on Yamal LNG. Diversification of the customer base has been a big part of Russia's energy strategy since 2014 while Europe is only now scrambling to diversify supply."
Europe has long been Russia’s largest customer of most energy commodities. However, the EU started to phase out purchases of Russian pipeline gas last year in response to Moscow's special military operation to demilitarize and de-Nazify Ukraine which kicked off on February 24, 2022.
The European Commission's figures for January-November 2022 indicated that Russian pipeline gas imports in the EU fell by 69 bcm year-on-year. The EC concluded that even allowing for increased LNG imports, total gas imports from Russia fell by 64 bcm.
However, on January 16, Russian Deputy Prime Minister Alexander Novak announced that the nation had increased pipeline gas supplies to the People's Republic of China by 49% through the Power of Siberia to 15.5 bcm. It is planned that the gas supplies to China will increase to 38 bcm annually by 2025. The 3,000 km gas pipeline – the largest gas transportation system in the East of Russia – was launched on December 2, 2019.
Moscow is gradually stepping up its gas supplies through the Power of Siberia in accordance with the Russo-China energy deal which was signed long before the special military operation, according to Igor Yushkov, one of the leading analysts of the National Energy Security Fund (FNEB).
"It should be noted, however, that now the increase is ahead of schedule, because Gazprom's offer for gas going through the Power of Siberia is especially advantageous for China," Yushkov told Sputnik.
In order to redirect most of its European volumes to the Chinese market, Russia should implement the Power of Siberia 2 project, according to the analyst. The pipeline is due to deliver 50 bcm annually to China using the same gas fields as Nord Stream 2 which was designed to carry 55 bcm per year to Germany. The latter project was suspended by Berlin on February 22, 2022, in response to Washington's pressure. A September 2022 sabotage attack finally disrupted the flow of Russian natural gas to Europe.
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Why Power of Siberia 2 is Viable for China

Meanwhile, the International Energy Agency's (IEA) World Energy Outlook 2022 threw the viability of the project into question and suggested that Russia’s reorientation to Asian markets will be "particularly challenging."
"China’s gas demand growth slows to 2% per year between 2021 and 2030, compared with an average growth rate of 12% per year since 2010," the report suggested.
The West's predictions about the Sino-Russian energy cooperation are short-sighted and biased, according to Ma Yujun, a research fellow at China's Heilongjiang Academy of Social Sciences.

"The West may have its own ideas about the forecasts of the Power of the Siberia 2 project between China and Russia," Ma told Sputnik. "Due to the Russian-Ukrainian conflict, Russian energy exports to the West have been severely limited, making exports to the East a priority choice to support the Russian economy. However, it is worth noting that China and the Russian Federation agreed on the Power of Siberia 2 project, which will pass through Mongolia, a long time ago, and it has nothing to do with the Ukrainian crisis. It is part of a long-term energy cooperation between our countries."

The Power of Siberia 2 is a planned gas pipeline between Siberian gas fields and the Xinjiang Uygur Autonomous Region in western China. The Power of Siberia 2 gas pipeline could eventually become a replacement for Russia's Nord Stream 2 pipeline.
The project was discussed during the September 2022 summit of the Shanghai Cooperation Organization (SCO). Alexander Novak noted at the time that final agreements on the Power of Siberia 2 are expected to be reached in the near future.
Earlier, Russian President Vladimir Putin announced the Russo-China agreement on the main parameters of gas supplies to China through Mongolia. The design stage of the Soyuz Vostok gas pipeline project, which will extend the Power of Siberia 2 through Mongolia to China, is expected to be completed in 2023.
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The expansion of the Power of Siberia not only meets China's strategic needs for energy imports in the context of diversifying oil and gas supply channels but also meets the needs of China's economic development, according to Ma. He noted that the 20th National Congress of the Communist Party of China (CPC) set a goal of optimizing and adjusting China's trade and enhancing cooperation with foreign countries.
"It should be said that after defeating the epidemic, the Chinese economy will open up great opportunities for development," stressed Ma. "Based on this condition, China's demand for energy can only grow. Therefore, China needs not only to increase energy imports from Russia, but also to strengthen energy cooperation with other countries and regions, such as Iran and Qatar."
In addition, China understands that if Russia's Nord Streams were blown up, then the same forces could easily arrange resource constraints for China, according to Yushkov. Russia's Power of Siberia 2 project will improve the reliability of China's gas supply, he underscored.
The diversification of Russia's gas supplies won't be limited to China, Christopher Weafer believes.
"I expect Gazprom to partner with a strategic investor from Asia or the Middle East to build a new LNG plant. This, plus bigger volumes from Yamal, will also help Russia's customer diversification strategy. A gas route to be built to both Pakistan and to India via a gas swap with Iran. Maybe involving a new pipe from southern Russia to northern Iran. The Turkish gas hub will be built and provide an important indirect route for Russian gas returning to Europe."
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Russia Reoriented Its Crude Volumes to the East

The West's restrictions on Russia's oil are a slightly different story, according to the observers: the Group of Seven, the EU and Australia are seeking to considerably slash the nation's revenues but not strangulate its ability to sell the commodity worldwide altogether.
Russia remains the third-largest producer of crude and the second-largest exporter of the commodity. If its crude and petroleum products are subjected to an outright ban, oil prices would go through the roof, western financial officials warned. Hence the price capping initiative targeting Russia's maritime oil deliveries to developing countries starting from December 2022, as well as the forthcoming cap on materials derived from crude.
Even though at the initial stages of the West's sanctions pressure, Russia's oil exports somewhat contracted, soon China and India emerged as the biggest buyers of the commodity, absorbing two-thirds of over two million barrels per day (mb/d) of Russia's seaborne crude abandoned by the West because of sanctions. Furthermore, according to Yushkov, the sweet discount of $35 per barrel lessened to just $18 in December 2022.
According to western oil watchdogs, India’s imports of Russian crude reached a whopping 1.2 million b/d last month, overtaking Iraq and Saudi Arabia. Yushkov explained that as Russia's oil is displacing a lot of those Middle Eastern barrels in Asia, Middle Eastern crude producers are filling the gap left by Russia in the European energy market. In addition, oil refinery services are also moving to Asia, according to the expert, with India and China plants boosting their profits from processing sweetly-priced Russian oil.

"I also expect the current uncertainty over the oil price cap to settle and for Russian oil and products after the EU ban starts in early February to be sold in growing volumes to Asian buyers," suggested Weafer. "Likely the discount will return to and continue around the level of the 25% to 30% discount seen last year, but no worse. Acquiring discounted energy provides a huge economic competitive advantage for India, Turkey, China and others and I expect they will continue as eager buyers for that reason."

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Despite China's COVID restrictions previously evoking strong bearish fears, the Organization of the Petroleum Exporting Countries (OPEC) saw a robust Chinese rebound this year in its latest report. OPEC projects that Chinese demand will grow by 510,000 bpd in 2023, adding that the world demand will rise by 2.22 million barrels per day (bpd), or 2.2%, this year.

"The key variable on the supply side is China's economy and whether it continues to be affected by COVID restrictions or can shake that off and resume growth," said Weafer. "Also, a growing Chinese economy will help create growth in other Asian economies and also add to oil demand."

Price capping won't suppress Russia's oil revenues or curb energy price spikes as the commodity price is expected to go up in 2023, according to the expert. Moscow warned that it wouldn't sell oil to those joining the G7's initiative and would cut production instead. The expert suggested Brent could "average $100 per barrel in 2023-2025 with OPEC managing supply to prevent a lower average or price spikes" if China's economy recovers and Russian slashes its production. According to him, "OPEC producers are targeting an average $100 per barrel (Brent) in the coming years because they can see oil demand falling steeply from mid next decade due to the expected growth in renewable and clean energy sources."
In addition, Russia and its Asian allies are switching to national tanker fleets and national insurance companies to cover maritime transportation of Russia's commodity, thus maintaining their energy trade outside of western control and restrictions, according to Yushkov.
"Regardless of whether Russia continues to send oil and gas to Europe, if at current low volumes or later recovery, the main focus from now will be further diversification and bigger sales to several big Asian economies," Weafer highlighted. "Russia will not wish to be overly exposed to China in the future (as it was to Europe) so will try to sell more oil, and eventually gas, to other big consumers such as India, Pakistan, Turkey and counties in SouthEast Asia."
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Sanctions are Backfiring

While Russia's oil and gas industry have demonstrated resilience in response to challenges posed by the West's sanctions spree, not everything is rosy on the European energy market, according to Yushkov.
Europe was forced to reduce its consumption of gas by 50-60 billion cubic meters, mostly by the industrial sector, he noted. As a result, European businesses shut down or cut production. Many of them are considering moving their production facilities either to the US or elsewhere in Eurasia where energy costs are lower and generally stable.
While the Old Continent managed to amass its gas stocks for the winter of 2022-2023 and avert the energy crisis, it bought huge amounts of liquefied natural gas (LNG) at top dollar. This eventually backfired on Europe's competitiveness as production costs have gone up, the expert explained.

"In addition, they are switching back from gas to coal. This is an amazing story. Europeans have been telling us for years about climate threats, that we need to abandon fossil energy sources, primarily coal (…) However, in Germany, an entire village was resettled because they are going to mine brown coal, the dirtiest type of coal, in its place. This is a step backwards in achieving decarbonization," Yushkov noted, referring to the recent protests over the demolition of the west German village of Lützerath, about 20 miles west of Dusseldorf.

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The expert stressed that it's happening not because of Russia, but because of the energy crunch that started to bite Europeans in 2021, well before Moscow's special operation in Ukraine. The EU's "green policies" and the crackdown on fossil fuels eventually resulted in energy deficits, he pointed out.
The forthcoming ban on Russian petroleum products in Europe which is due to come into force in February 2023 is likely to complicate matters even further, admit international oil experts. Even though Europe's reliance on Russia's oil products decreased by a whopping 50% since the beginning of Moscow's special operation in Ukraine, Russia still remains the bloc's largest diesel supplier.
The European bloc struggled to secure Russian diesel three months before the February ban. Russian diesel deliveries to the Old Continent's Amsterdam-Rotterdam-Antwerp (ARA) oil refining hub soared to 215,000 barrels per day from November 1 to 12, 2022 amounting to a 126% spike from October. It's still unclear who will fill Russia's shoes in terms of petroleum products deliveries.
However, the crux of the matter is that Europe has no one to blame in the unfolding energy constraints but itself, Yushkov summarized.
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