energy security
program
RUSSIA’S ARCTIC DREAMS HAVE
CHINESE CHARACTERISTICS
JEREMY MA XIE AND DAVID SL AY TON
T
he most significant geophysical event on our planet since the
end of the ice age is taking place today—the opening of the
Arctic. As the High North maritime environment warms, the
Arctic Ocean’s abundant energy, minerals, fish stocks, and
other natural resources are becoming increasingly accessible, while new
potential maritime routes promise to reduce shipping times and costs and
accelerate ties between major commercial centers. These new opportunities
for energy development, natural resources extraction, and shipping suggest
that the region risks becoming an arena of intense competition, tension,
and potentially even confrontation, not only between the United States
and its two near-peer strategic competitors—China and Russia—but also
among other Asia-Pacific states with observer status in the Arctic Council.
Without question, the Arctic Ocean region is emerging as a new
geopolitical and geoeconomic landscape with significant security and
environmental implications for the United States as well as for U.S. allies
and partners in Europe and Asia. Whether the region remains a venue for
multilateral cooperation and sustainable development or becomes an arena
for great-power competition is highly uncertain. Aside from the impacts
of a warming climate, two key geopolitical developments will shape the
Arctic’s future: (1) Russia’s extensive extended continental shelf claims and
its willingness to abide by an impending “recommendation” by the UN
Commission on the Limits of the Continental Shelf (CLCS), and (2) the role
JEREMY MAXIE is Senior Advisor on
Energy and Natural Resources at Longview
Global Advisors.
DAVID SLAYTON is a Research Fellow
at the Hoover Institution, a member of
the Shultz-Stephenson Task Force on
Energy Policy, and co-chair of the Arctic
Security Initiative.
the national
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of China as a strategic player and self-described “near
Arctic” state whose ambitions are highly uncertain.
By analyzing and monitoring Sino-Russian energy
cooperation in the Arctic as a signpost, concerned
stakeholders and policymakers can draw inferences
about the potential for broader strategic collusion
between Russia and China in the Arctic that could
challenge regional security, multilateral governance,
and international law.
Russia’s Ambitions in
the Arctic
Russia’s vast landscape dominates the Arctic,
with its northern coastline spanning nearly half the
circumference of the Arctic Circle. Even so, Russia has
spent the past fifteen years working diligently to further
increase its share of the Arctic through the addition of
1.2 million square kilometers (463,000 square miles), an
area almost three times the size of California.1 Russia’s
extended continental shelf claim reaches 150 nautical
miles (nm) beyond its exclusive economic zone (EEZ)
into the international waters of the Arctic Ocean as far
as the North Pole. Moscow initially submitted its claim
to the Lomonosov and Mendeleev Ridges in 2001, which
the CLCS noted lacked sufficient documentation. After
several years of additional research, Russia submitted
a revised claim in August 2015 that included the
Mendeleev elevation, and in February 2016 it added the
Chukchi high plain to the claim.2
On August 8–12, Russia presented its revised claims
before the CLCS. However, it will likely take years for
the CLCS to make a final recommendation, which will
not be legally binding. Should the commission find in
favor of Moscow, Russia’s options would be to either
unilaterally assert its rights to the extended continental
shelf or engage in bilateral negotiations with Canada
and Denmark, which have also made claims to this
1Ragnhild
Grønning, “Russia Presents 1.2 Million Square Kilometers
Arctic Claim to the UN,” High North News, February 11, 2016, http://
www.highnorthnews.com/russia-presents-1-2-million-square-kilometersarctic-claim-to-the-un.
2Submissions
are available from the Division for Ocean Affairs and the
Law of the Sea, Office of Legal Affairs, United Nations, http://www.
un.org/depts/los/clcs_new/commission_submissions.htm.
2
area. (The United States has signed but not ratified the
UN Convention on the Law of the Sea, or UNCLOS,
and therefore has not officially presented any extended
continental shelf claims.) Such negotiations would
likely take years, if not decades, to finalize. While an
extended continental shelf provides rights to the subsea
and subsoil resources, it does not confer sovereignty or
jurisdiction over the superjacent waters. Finally, even
if Russia’s claims are upheld by the CLCS, it would still
likely take decades to commercialize resources in this
contested area.
The time and resources that Moscow has dedicated to
pursuing its extended continental shelf claims over the
past fifteen years signal the Arctic’s strategic importance
in Russia’s long-term planning. As the earth warms,
access is slowly opening in the Arctic to vast amounts
of undeveloped oil and natural gas, minerals (including
copper and iron ore), and fishing stocks that will serve
as a resource base to fuel Russia’s rent-seeking political
economy for decades. Russia is specifically looking
to Arctic oil and natural gas to help offset declining
production from mature fields in Western Siberia in
order to sustain output levels at post-Soviet highs and
keep state revenues flowing. According to a report from
the National Petroleum Council, Russia holds 58% of the
Arctic’s undiscovered petroleum resources: 30.5 billion
barrels of oil, 1,144 trillion cubic feet (tcf) of natural
gas, and 27.5 billion barrels of natural gas liquids. 3
Meanwhile, the U.S. Geological Survey estimates that
the Lomonosov Ridge could hold an additional 1.1 billion
barrels of technically recoverable undiscovered oil and
7.16 tcf of natural gas.4 These volumes are sizeable in
their own right but relatively modest compared with
the already abundant resources in Russia’s existing
Arctic zone.
Overall, most of these oil and gas resources are located
in shallow water near the coastline or onshore. Given
the challenges in operating in the deepwater offshore
Arctic, Russia is prioritizing development of the shallow
3National
Petroleum Council, “Arctic Potential: Realizing the Promise
of U.S. Arctic Oil and Gas Resources,” March 2015, http://www.
npcarcticpotentialreport.org/pdf/AR-Part_1-Final.pdf.
4Philip
Budzik, “Arctic Oil and Natural Gas Potential,” U.S. Energy
Information Administration, October 2009, http://www.legis.state.ak.us/
Basis/get_documents.asp?session=28&docid=741.
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waters of the Barents and Kara Seas, as well as onshore
on the Yamal Peninsula in conjunction with a planned
expansion of the Northern Sea Route.
Russia’s War y Look East
As the warming of the Arctic Ocean opens a new
maritime space, it is inviting commercial and strategic
competition from non-Arctic states in Asia. In 2013,
the Arctic Council, whose members consist of Canada,
Denmark (including Greenland/Faroe Islands), Finland,
Iceland, Norway, Russia, Sweden, and the United
States, granted “permanent observer status” to China,
India, Japan, Singapore, and South Korea. At first
Russia resisted this move, but it reluctantly consented
once these non-Arctic states pledged to recognize the
territorial sovereignty of the eight members as well as the
application of UNCLOS to the Arctic Ocean.
A key driver of Russia’s long-term Arctic strategy is to
defend its perceived sphere of influence in the Arctic and
its extended continental shelf claims against the threat
of internationalization led by these Asian observers,
particularly China. Russia’s extended continental shelf
claims overlap with the international waters of the Arctic
Ocean’s high seas. Known as the “donut hole,” this
central area is beyond the reach of the five Arctic-state
EEZs (belonging to Canada, Denmark, Norway,
Russia, and the United States) and is considered part
of the global commons. Non-Arctic states, particularly
Asian observers, look to these international waters for
opportunities to secure a strategic foothold in the region
and harvest their perceived fair share of Arctic resources.
While China has not yet articulated an official Arctic
policy, it claims to be a near-Arctic state with legitimate
rights and interests in the Arctic. In 2010, retired rear
admiral Yin Zhuo notably declared that “the North Pole
and the sea area around the North Pole belong to all the
people of the world.”5 This statement has been frequently
interpreted by analysts on both sides of the Pacific to
mean that China believes that no country can have
sovereignty over the Arctic. This interpretation has had
5Linda
Jakobson and Jingchao Peng, “China’s Arctic Aspirations,”
Sockholm International Peace Research Institute (SIPRI), SIPRI Policy
Paper, no. 34, November 2012.
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a long shelf life, given that Beijing has not yet clarified
the scope of its interests and ambitions in the region.
History has repeatedly demonstrated that Russia and
China will remain strategic competitors regardless of
their many shared interests. However, since 2014, the
combination of low oil prices and targeted sanctions by
the United States and European Union have significantly
restricted Russia’s plans to develop Arctic oil and natural
gas. Without access to key technologies from these
countries and international financing, Arctic greenfield
projects will not likely be realized. Despite Russian
concerns over China’s long-term ambitions regarding the
Arctic’s global commons, China is positioning itself as
an indispensable partner in the development of Russia’s
Arctic zone.
Nowhere is this more evident than with the Yamal
liquefied natural gas (LNG) project, which symbolizes the
growing asymmetry in the energy relationship between
Russia and China. Located deep within Russia’s Arctic
zone, the project has been subject to sanctions targeting
Arctic development generally and Novatek specifically.
As a result, the project’s ability to move forward has been
largely dependent on China’s participation throughout
the value chain, including as an upstream equity partner,
strategic investor, lender of last resort, LNG buyer, tanker
operator, and even equipment supplier.
Chinese investors hold a combined 29.9% equity
position in Yamal LNG.6 Under a deal struck in 2015,
China’s Silk Road Fund secured LNG cargoes from the
project through a 9.9% equity stake for $1.4 billion and
a fifteen-year loan for 730 million euros. China National
Petroleum Corporation (CNPC) acquired a 20.0%
equity stake in 2013 for an undisclosed amount. The
remaining stakeholders are Novatek (50.1%) and Total
(20.0%). The $27.5 billion project was ultimately saved
from the impact of sanctions by China’s state “policy”
banks that have agreed to provide $12.2 billion as part
of two fifteen-year loans from the Export-Import Bank
6Novatek,
“IFRS Consolidated Interim Condensed Financial Statements
(Unaudited) as of and for the Three and Six Months Ended 30 June
2016,” 12, http://www.novatek.ru/common/tool/stat.php?doc=/common/
upload/doc/NOVATEK_FS_6m2016_ENG_FINAL.pdf.
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of China ($10.7 billion) and China Development Bank
($1.5 billion). 7
Meanwhile, exactly how much Yamal LNG is destined
for final delivery to China is uncertain. Yamal’s three
LNG trains are expected to produce 16.5 million tonnes
per year (mtpa) by 2020, with the first 5.5 mtpa train
planned for start-up in 2017.8 Nearly 96% of future
cargoes are presold under long-term year contracts: Total
Gas and Power (4.0 mtpa), CNPC (3.0 mtpa), Novatek
Gas and Power (2.4 mtpa), Spain’s Gas Natural Fenosa
(2.5 mtpa), and Gazprom Marketing and Trading
Singapore (2.9 mtpa).9 Approximately, 86% of these
cargoes are expected to be delivered to Asia-Pacific
markets.10 Some cargoes will likely be sold on European
and Middle East markets, while other Asia-bound cargoes
will find their way to Japan and South Korea, as well as
to growing markets in South Asia and Southeast Asia.
To deliver this Arctic gas to global markets, fifteen
ARC-7-class icebreaking LNG carriers are being
constructed by Daewoo Shipbuilding and Marine
Engineering. Nine of these will be operated by joint
ventures involving Chinese companies: six will be
operated by Teekay LNG and China LNG Shipping
(Holdings), and three by Mitsui OSK Lines and China
Shipping (Group). With one cargo loaded every 38
hours on average, each tanker is expected to make about
fourteen voyages per year: four to five via the summer
route and nine to ten via the winter route.11
While Yamal LNG will be shipped year-round, even
these special tankers will only be able to safely and
7“Update
2: Russia’s Yama; LNG Gets Round Sanctions with $1 2 Bln
Chinese Loan Deal,” Reuters, April 29, 2016, http://www.reuters.com/
article/russia-china-yamal-idUSL5N17W2G8.
8Stuart
Elliott, “Yamal LNG Now Contracted to Sell 100% of Future LNG
Output: Novatek,” Platts, May 9, 2016, http://www.platts.com/latest-news/
natural-gas/amsterdam/yamal-lng-now-contracted-to-sell-100-offuture-26437664.
9“UPDATE
1-Russia’s Novatek Signs LNG Supply Contract with
France’s Engie,” Reuters, June 2, 2015, http://af.reuters.com/article/
energyOilNews/idAFL5N0YO36020150602.
10 “Yamal
LNG Project Signs Contracts for Sale of 96% of LNG It Produces,”
Tass, March 17, 2016, http://tass.ru/en/economy/863064.
11 Suryan
Wirya-Simunovic (presentation at 28th Gastech Conference and
Exhibition, Singapore, October 2015), http://www.gastechnews.com/wpcontent/uploads/2015/10/Wirya-Simunovic-Suryan_MOL.pdf.
reliably transit the Northern Sea Route east to Asia
from June to November. Known as the summer route,
the voyage from Yamal to Shanghai is approximately
4,900 nm and takes 16.5 days. In comparison, the route
from the Persian Gulf to Shanghai is about 5,600 nm
and 15.5 days. For the remainder of the year, LNG will
be shipped west to Europe via the so-called winter route.
From there, most cargoes will be transshipped to Asia
via the Suez Canal, extending the voyage from Yamal to
Shanghai to 13,700 nm.12
New Model for Arctic
Development?
The question going forward is whether Yamal LNG is
a potentially transformative model for Russian-Chinese
energy cooperation in the Arctic or if it is merely a
one-off occurrence driven by sanctions avoidance.
To be sure, China’s extensive involvement in Yamal
LNG throughout the value chain represents a new
development. Russia has long seen China as a key growth
market and source of investment, yet prior to sanctions it
was reluctant to offer Chinese companies equity positions
in major upstream projects on the scale of Yamal LNG.
While China positioned itself as an indispensable
partner in Yamal, it is not yet a preferred partner.
Instead, Russia has preferred to partner with mostly
international oil companies (IOC), which, in addition
to finance, bring to the table the business acumen,
cutting-edge technology, and project management
experience to develop resources at lower cost. Rosneft’s
deals with Statoil, Eni, and ExxonMobil that were signed
in 2012, and stalled by targeted sanctions, demonstrate
this preference. Even when Rosneft has contracted with
China Oilfield Services Ltd. to conduct exploratory
drilling in the Sea of Okhotsk and seismic surveys
in the Barents Sea, it has done so in the context of its
strategic partnership with Statoil. Should sanctions be
lifted, Rosneft will quickly seek to resume its strategic
partnerships with IOCs.
To the extent that Yamal LNG represents a
transformative model for Sino-Russian cooperation in
12
4
See Wirya-Simunovic.
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the Arctic, then Chinese companies may more frequently
partner with IOCs in the future rather than just serve as
sanctions-driven substitutes. Second, Chinese companies
may also become more deeply involved throughout the
value chain, rather than just being the lenders of last
resort and a downstream market. These two possible
outcomes are likely to be driven by China’s strategic
interests in the Russian Arctic as a resources base and the
ambitions of China’s national oil companies to become
commercially competitive with IOCs by acquiring Arctic
operational skills and technology.
However, the scope and durability of China’s role in
the Arctic can only be tested once sanctions are lifted.
Even then, China will face increasing competition from
other Asian national oil companies, in addition to
IOCs, as the Arctic becomes internationalized and more
integrated with East Asia. In particular, Russia is looking
to develop partnerships with the other Asian observer
states—India, Japan, Singapore, and South Korea—rather
than risk the Arctic becoming a resource appendage to
China. Ultimately, China’s role in the region may be
limited by Russia’s need to hedge against the risks of a
Chinese monopsony.
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China’s Energy Crossroads (2014) detailed major shifts underway in Beijing’s energy security
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