China and Russia want to develop Arctic energy resources together, and US disapproval may not deter them

Donald Gasper says China has helped to finance Russia’s quest to develop Arctic resources after US sanctions, and deeper involvement may follow if Beijing can acquire a management role

Donald Gasper

Published: 5:00am, 12 Sep 2018

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In a major breakthrough this summer, the first shipment of liquefied natural gas was made from the Russian port of Sabetta, home to the Yamal LNG project in the Russian Arctic, to the Chinese port of Rudong in Jiangsu.

Two LNG tankers, the Vladimir Rusanov and the Eduard Toll, with a cargo capacity of over 172,000 cubic metres each, sailed without any icebreaker escort through the Northern Sea Route, which China is calling the Polar Silk Road, in just 19 days, compared to the 35 days that it would normally take to navigate the traditional eastern route via the Suez Canal.

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This follows the State Council Information Office’s first official white paper on “China’s Arctic Policy”, issued on January 26, proclaiming that the country now regarded itself as a “near-Arctic state”. It stated that China wished to encourage joint efforts to build a “Polar Silk Road” or “blue economic passage”, linking it with Europe through the Arctic Ocean, and repeated that this should be embedded in the Belt and Road Initiative.

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The notion of a “Silk Road on Ice” goes back to a December 2015 meeting of Chinese and Russian heads of government that advocated cooperation in Arctic navigation. A joint statement stated for the first time that both sides would work together to develop the northern sea route along the Russian Arctic coast into a competitive commercial sea route.

Global warming has made it easier to transport goods via the Arctic route, reducing reliance on the risky Malacca Strait and knocking days off the journey time. It has also made it easier to tap the vast mineral resources that lie beneath the ice.

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Apart from fossil fuels and minerals, the white paper speaks of developing sustainable energy sources such as wind and geothermal power and says that Beijing is committed to the responsible development of such resources in partnership with local actors.

Partnership with Russia, which has pioneered several environmentally friendly technologies for use in the region, is the key to developing the Arctic. Although progress towards closer cooperation has at times been glacially slow, there are signs that relations are warming, with new breakthroughs possible in the near future.

China’s growing involvement in the liquefied natural gas project being built on the Yamal Peninsula in the Arctic Zone of the Russian Federation is an example of successful cooperation.

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This became partially operational by the end of last year, with total annual capacity planned to reach 16.5 million tonnes of LNG by 2021, with most of this to be exported to customers in Asia and the rest to Europe.

In September 2013, Russian producer Novatek signed a contract with China National Petroleum Corporation for a 20 per cent stake in Yamal LNG. The Russian side agreed to supply not less than 3 million tonnes of LNG to China per year (18 per cent of total capacity).

Russian President Vladimir Putin meets then-US President Barack Obama on the sidelines of the G20 Summit in Hangzhou in 2016. Russia’s development of the Arctic suffered a severe setback because of sanctions, led by the US and EU, after Russia’s invasion of Crimea in 2014. Photo: EPA

However, the Yamal project and Russia’s plans to develop the Arctic region were significantly jeopardised by the sanctions imposed by the United States and the European Union in July 2014, after the incorporation of Crimea into the Russian Federation.

Cooperation between Russian firms and their international partners in the Arctic – including ExxonMobil, Statoil and Eni – was immediately suspended. Novatek experienced difficulties in obtaining funding for the Yamal LNG project.

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It was at this point that Chinese banks stepped in. According to The Moscow Times in November 2014, Chinese banks said they were ready to invest US$10 billion in the project.

In September 2015, in a deal worth €1.089 billion (US$1.27 billion), Novatek sold 9.9 per cent of Yamal LNG to China’s Silk Road Fund. As part of the agreement, in December 2015 the Silk Road Fund extended a loan of about €730 million to Novatek to be repaid after 15 years.

The Vladimir Rusanov, a liquefied natural gas tanker ship, arrives at the LNG terminal in Nantong city, in eastern China's Jiangsu province, on July 19 after its journey from Russia's Arctic Yamal peninsula. Photo: AFP

In April 2016, Yamal LNG announced it had signed contracts with the China Exim Bank and the China Development Bank for two 15-year credit lines worth €9.3 billion and €9.8 billion respectively.

A report by Camilla Sorensen and Ekaterina Klimenko, researchers at the Stockholm International Peace Research Institute, speaks of an “impressive track record of cooperation between China and Russia on the Yamal LNG project”.

It says that “China secured a good overall deal.” For example, the agreement specified that up to 80 per cent of the equipment for the project was to be produced in Chinese shipyards. (So far, China has supplied as much as 60 per cent of the capital needed to implement the project.)

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“The Kremlin’s openness to foreign, and primarily non-Western, participation in Russian energy projects (including Arctic projects) has significantly increased,” the report says.

“Chinese-Russian cooperation on developing energy resources and sea routes in the Russian Arctic looks like an objective where Russia and China could work closely together and have complementary interests.”

Leonid Mikhelson, CEO of Novatek, looks on from the audience during a news conference ahead of the Eastern Economic Forum in Vladivostok on September 10. Novatek has been subject to US sanctions targeting the Russian energy sector since the invasion and annexation of the Crimean peninsula in 2014. Photo: Bloomberg

Russian officials are now talking about attracting Asian countries like China, South Korea and Japan not just as customers for the northern sea route, but also as its co-developers.

From China’s perspective, the exploitation of oil and gas in the Arctic needs to be accompanied by construction of the northern sea route. Both Arctic energy resources and the shipping route require further investments of capital and technology, so political will is required from both Russia and China.

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In the past, Chinese scholars admit, China was cautious about getting involved in projects that might antagonise relations with the US. After the start of the trade war, initiated by the Trump administration, the situation may have changed.

A precondition for greater Chinese involvement in projects with Russia is likely to be being granted more say in how the projects are run. China does not simply want to be part of such projects – it wants to have a stake that will permit it to have a role in management.

“Chinese companies are in a very strong position at the moment and would not agree to anything less than a significant control and management role,” the Stockholm International Peace Research Institute report says.

Donald Gasper is a Hong Kong-based analyst and commentator

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