Russian-Chinese Energy Partnership: One Proposal

March 3, 2004
By Robert Dudley

The Kovytka project – harnessing this untapped gas field as a new source of supply – can serve as the foundation for a mutually-beneficial Russian-Chinese energy relationship. Russia has the supplies; China the demand.

China's growing demand for natural gas for power and heating needs, especially in Northern China, is outstripping the country's domestic supplies. By the middle of this decade, China will need to import gas. A similar window is expected to open in South Korea as well. There is no reason why both cannot import from Russia, tapping the potential of the Kovytka fields.

With some 1,472 billion cubic meters in reserves, Kovytka can easily meet the energy needs of Eastern Siberia, leaving plenty to spare for export. We conclude that Kovytka could begin supplying gas to the Irkutsk region (and onward to include Buratiya and Chita) in 2006, but eastern Siberia is likely to consume only 4 billion cubic meters on an annual basis. With the construction of a gas pipeline to China (with an extension onward to South Korea), northeastern China could start receiving gas from Kovytka by 2008, just as the first shortages begin to become apparent, and could easily absorb three times as much gas annually as Irkutsk (approximately 12 billion cubic meters per year). South Korea could account for a further 10 billion cubic meters every year, and it would be possible to extend the line to the rest of the north; we estimate that an additional 8 billion cubic meters per year could be absorbed by that market.

There are a number of real benefits for Russia if it undertakes this project. Substituting gas for coal to power electrical plants could vastly improve the ecological situation in the Lake Baikal basin. Construction and maintenance of the pipeline would generate jobs and spill over to other local industries. We estimate that the government itself would profit from increased tax revenues (around $800 million).

Yet this project is not sustainable without the Chinese component. Domestic Russian demand in eastern Siberia is insufficient as a spur to develop the Kovytka field on a large scale. Only by seeing Kovytka as a energy source for China and Korea is there the incentive to pump the gas from the ground.

And there is a limited window of opportunity. Right now, there is a potential alignment of interests between Russia, China and South Korea to develop the Kovytka field and construct the pipeline.

Russia needs to recognize that Kovytka is an asset that needs to be monetized. Without guaranteed export markets in China and Korea, the vast majority of the gas resource will remain in the ground, unused for decades. It is not economical to pipe the gas to other markets further afield. Kovytka is also, realistically, the "anchor" project for any North-East Asian Regional Energy Corridor (NEAREC). Oil in sufficient quantities has not yet been discovered that would justify an oil pipeline from eastern Siberia to East Asian markets. The gas is there now and it is ready to move. The Kovytka project could generate a stable energy relationship between Russia, China and South Korea that would lay the basis for other forms of cooperation in the future.

But China and Korea cannot wait indefinitely for the Russian view of this project to coalesce. China is looking at other alternatives.  If a project for gas from Kovytka is not progressing, China will turn to other sources of supply--notably Liquefied Natural Gas (LNG) imported from other sources into Northeast China.

In addition to Russian national interests, there are U.S. and Japanese interests at stake with Kovytka. If not exported to Asia, Kovytka gas will remain untapped and unused. If successfully developed, Kovytka will increase the overall amount of energy in world markets. Rather than competing for LNG supplies, China and Korea can enjoy a more secure supply and the LNG supplies can be diverted to other markets. This reduces competition for scarcer supplies and we believe that this also enhances America's and Japan's own energy security in the long run.

Robert Dudley is president and CEO of TNK-BP (www.tnk-bp.com)