Prospects for China-US and China-Russia Energy Cooperation Post Xi-Trump Meeting

The meeting between Chinese President Xi Jinping and U.S. President Donald Trump at Mar-a-Lago laid a good foundation for China-U.S. relations for the next few years. On the topic of economic and trade cooperation that the world was concerned with, both sides expressed the will to expand real collaboration on areas such as energy and infrastructure, to provide access to each other’s market, and to drive the economic relations between the two countries toward more balanced development.

A few days later, Chinese Vice Premier of the State Council Zhang Gaoli visited Russia. He attended the cooperation committee meetings between the two governments on investment and energy. He also met with Russian President Vladimir Putin. Zhang Gaoli expressed the need for the two countries to accelerate progress on major energy projects and to focus on more collaboration on investment. Putin confirmed that collaboration between the two countries on key projects, such as the Eastern Route Natural Gas project and the Yamal Liquefied Natural Gas project, was smooth and making good progress.

From the geopolitical perspective, the China-Russia-U.S. triangle for many years has been the focus of analysis and debate. Because of this Xi-Trump meeting, the issue of China-U.S. energy cooperation was put on the table and it is hoped that it will be enhanced in the future. But this will not have a negative impact on China-Russia energy cooperation. On the contrary, it will be beneficial to the latter in the long run.

Looking back at history, China became a net importer of oil in 1993, and as its economy grew, its import of oil continued to increase at high speed. On the issues of controlling overseas hydrocarbon resources and transportation channels, America, as the world’s biggest consumer and importer of oil, was, for a long time, China’s “imagined rival” in importing crude oil and ensuring a secure supply. In the meantime, disagreements between China and the U.S. on advanced technology transfer and on climate change, as well as America’s strict domestic law and regulations on investing in energy, made it difficult for companies in both countries to embark on full collaboration on energy.

However, the change in global energy markets, triggered by America’s shale gas revolution beginning in 2008, and the subsequent possibility of America’s energy independence, made it possible for China and the U.S. to expand their energy cooperation. It is necessary to emphasize that the shale gas revolution was not a mere technological breakthrough, but a change in the structure of the international oil and gas market. On the one hand, the increased production of oil and gas by the U.S. and the reduced cost meant that America’s dependence on overseas oil and gas was greatly reduced. It also made America a powerful “swing producer” in oil, second only to Saudi Arabia, thus having a serious impact on global oil and gas prices. On the other hand, major oil and gas producers, such as the Middle East, Canada and Russia, which originally targeted the American market, had to readjust their direction. And they found in China, with its insatiable demand for the resources, a reliable buyer.

If that had been all, it would only have reduced the force of energy competition between China and the U.S. But the “America First” energy policies Trump proposed during his election campaign and implemented after he took office will greatly drive China-U.S. energy cooperation forward. The core of Trump’s energy policies is twofold: to highlight and further explore the well-known advantages of fossil fuels, and to slow down the support for renewable energy whose prospect is not yet clear. Regarding fossil fuels, Trump plans to increase America’s domestic production of oil and gas, to lift policies and regulations restricting oil and gas exploration and consumption, and to enhance oil and gas infrastructure (for example, revive the Keystone XL and Dakota Access pipelines, the construction of which was rejected by Barack Obama, and lift restrictions on the construction of natural gas terminals and pipelines). He also plans to relax restrictions on American oil and gas companies’ overseas trade deals as well as revive the coal industry and stimulate the demand for coal. Regarding renewable energy, Trump repealed the Obama administration’s Clean Power Plan and opposed generous government subsidies for clean energy. As a result, renewable energy, such as wind, now has an even more uncertain future, and its development is slowing down.

Trump’s energy policies will bring some uncertainties around the use of clean coal and America’s participation in global climate policymaking, but the prospect is positive in other aspects and it is a crucial turning point in China-U.S. energy cooperation.

First, America’s output of shale oil and gas will increase and the country’s dependence on imported oil and gas will continue to decrease. In the future, America will become a net exporter of oil and natural gas. This is a good prospect for China-U.S. trade. According to statistics from the U.S. Energy Information Administration, America’s net energy import was reduced by two-thirds from its peak in 2005 and its dependency on overseas energy came down to only 11 percent. The EIA predicted that the year 2025 would see America become a net exporter of energy. Regarding oil, America’s dependency on imported oil dropped to 24 percent in 2015 from 66 percent in 2005 (which is approximately China’s current dependency on imported crude oil). America’s major source of imported oil is no longer the Middle East but its neighboring countries, such as Canada and Venezuela. Now that the Obama administration had lifted the ban on crude-oil-export from America, we cannot rule out the possibility that the U.S. will become a future oil exporter if Trump’s policies on domestic oil production prove to be effective.

In fact, Russia’s Ministry of Energy admitted that, in the past few months, America’s increase in shale oil output to a large extent compensated for the decline in production from oil producers. This is proved by the current reluctant rise in oil prices. In terms of natural gas, the EIA predicted that America’s future net export of liquified natural gas would keep rising at a fast pace and reach almost 70 billion cubic meters (approximately 18.5 trillion liquid gallons) by 2020, 19 times the amount in 2016. By 2030, the export was predicted to hit 140 billion cubic meters (approximately 37 trillion liquid gallons). As a matter of fact, China has started importing LNG from the United States. In August 2016, for instance, Guangdong Dapeng LNG Co. Ltd. received LNG exported for the first time from the U.S. to Asia-Pacific. The fact that China imports oil and gas from America will create a win-win situation. China can diversify its oil and gas imports and reduce its dependence on the Middle East. Meanwhile, having found the next commodity for export to China, in addition to agricultural produce and jumbo jets, America will be able to reduce its trade deficit with China.

Second, America’s more relaxed investment policies on the oil and gas industry will encourage more Chinese investment in America’s energy sector. Although under Trump’s slogan of bringing back American jobs it is still difficult to imagine a world-class Chinese engineering workforce taking on projects in America, China nevertheless is an ideal partner for America’s infrastructure projects because of China’s investment capabilities, construction efficiency and supporting facilities in the engineering and construction industry. If the U.S. is willing to open part of its market to China or to let China participate in some parts of the projects instead of taking over entire projects, it will benefit both sides. On the one hand, the Asian Infrastructure Investment Bank led by China can participate in funding America’s infrastructure projects; on the other hand, Chinese President Xi’s proposal to invite America to participate in the “One-Belt-One-Road” initiative may come to fruition in this industry.

Meanwhile, America’s lifting of restrictions on its oil and gas industry will encourage Chinese companies to invest more in America. In fact, America’s oil and gas industry operates within a mature legal system, enjoys advanced technology, and benefits from reliable professionals and services as well as free and full competition. In the past, there were already Chinese companies investing in America’s oil and gas industry, but the general impression was that there was heavy oversight with thin profit margins. If Trump’s policy-loosening will work, and if the two governments can work together more in areas such as market intelligence and investment facilitation, then collaboration between the two countries will greatly improve to the next level.

Third, against the backdrop of China’s proposal of “four revolutions and one cooperation” in energy, America’s reduction of subsidies to the new energy industry will, to a large extent, encourage China-U.S. cooperation in new energy technologies. Despite American experts’ belief that retreat from the field of new energy will mean handing over control to China, America still possesses the world’s leading technologies and China needs to enhance its development through technological collaboration with the United States.

Energy cooperation is like ballast or a stabilizer for China-Russia relations, too. Although China and the U.S. are looking to increase energy cooperation, it does not mean that energy cooperation between China and Russia will weaken as a result. Overall, the impact on China-Russia cooperation will be limited, and in the long run, it may strengthen the latter.

First, China-Russia energy cooperation is developing steadily and no external force can easily alter this situation and its course. Oil and gas cooperation between China and Russia is mainly through pipelines over land, connected directly and not via a third country, so it is stable, secure and built to last. Regarding oil, the current crude oil trade between China and Russia accounts for about 15 percent of each country’s total import and export activity, which is a healthy proportion. The pipelines operate well and steadily. Regarding natural gas, the pipelines for the East Route project between China and Russia are under construction as planned, and those on the West Route are on track in negotiation. Major oil and gas projects meet China and Russia’s unique needs, and the two sides therefore are unlikely to take drastic turns in their strategies.

Second, energy cooperation between China and Russia, and that between China and the U.S., differ in content and participants. One complements, not replaces, the other. Russia’s oil and gas market is relatively less open, an area in which large state-owned corporations dominate or even have a monopoly. Therefore, China-Russia energy cooperation usually means direct dialogue between state-owned enterprises of the two countries. Over time, this has solidified into stable collaboration with mutual trust. In contrast, the American market is more open and diverse, and Chinese investment in America comes more often from private enterprise, and collaboration takes additional forms and is much more flexible.

Third, if China can strengthen its energy cooperation with the U.S. and with Russia, it will be able to contribute more to the global energy market and raise the overall level and quality of collaboration. On the one hand, collaboration in the form of oil and gas trade can increase the commodities’ global circulation, reduce the cost of trade and help with price formation. In natural gas particularly, because the markets in North America, Asia-Pacific and Europe are not well connected, prices in the three regions vary greatly and the Asian premium is an obvious problem. China’s importation of natural gas from Russia and liquified natural gas from America leads to more correlation between the different prices in the three regions and thus helps to eliminate price differences. On the other hand, energy cooperation with the U.S. and with Russia will bring together different market mechanisms and different methods of collaboration, thus enriching the experience as well as raising the standards.

Of course, we must also recognize that America’s increasing output and export of oil and gas will inevitably intensify competition between Russia and the U.S. on the international energy market. But this kind of competition will be market-oriented and therefore healthy. China, as an important importer of oil and gas, will continue to play its role to help balance the market and reduce risks.

The author works at the Academy of Chinese Energy Strategy, China University of Petroleum – Beijing.