PTR Petrochina Company Ltd

By Georgi Kantchev | Photographs by Arthur Bondar for The Wall Street Journal 

SVOBODNY, Russia -- An 1,800-mile pipeline is set to begin delivering Russian natural gas to China on Monday. The $55 billion channel is a feat of energy infrastructure -- and much more.

Russia's most significant energy project since the collapse of the Soviet Union, the Power of Siberia pipeline is a physical bond strengthening a new era of cooperation between two world powers that have separately challenged the U.S.

Beijing and Moscow, after years of rivalry and mutual suspicion, are expanding an economic and strategic partnership influencing global politics, trade and energy markets. At the same time, Beijing is fighting a trade war with Washington, and Russia's relations with the West grow colder.

"China and Russia joining forces sends a message that there are alternatives to the U.S.-led global order," said Erica Downs, a Columbia University fellow and former CIA energy analyst.

Presidents Vladimir Putin and Xi Jinping will lead the opening ceremony of the pipeline via video links. Mr. Xi has described the Russian leader as his "closest and most intimate friend" among his foreign colleagues.

Russia, which has the world's largest proven gas reserves, needs cash as its economy buckles under Western sanctions. China, with the world's second largest economy after the U.S., needs fuel and wants to wean itself off coal.

"China needs energy resources, and Russia has such resources," Mr. Putin said in October. "This is an absolutely natural partnership, and it will continue."

The collaboration took off after the U.S. and European Union moved to punish Moscow for taking control of Ukraine's Crimean Peninsula in 2014. Facing painful sanctions, the Kremlin turned to countries that wouldn't shut it off.

Russia officially annexed Crimea in March 2014. The pipeline deal with China was settled that May, in a $400 billion gas-supply agreement signed by Messrs. Putin and Xi.

Cooperation has since extended to military ties. In September 2018, Chinese and Russian troops took part in joint maneuvers, the first time Moscow invited a country outside a tight circle of former Soviet allies to its largest annual exercises.

Russia-China trade reached a record level that year, exceeding $100 billion, according to Russian government data.

In June, China's Huawei Technologies Co. struck a deal with Russian mobile operator MTS to develop a 5G network in Russia, while on a export blacklist in the U.S.

Earlier in November, the U.S. Federal Communications Commission labeled Huawei and China's ZTE Corp. as a "national security threat." The move bans American companies from using federal subsidies to buy or maintain products from those firms. Huawei plans to fight the decision; its founder said this month that his company "can survive very well without the U.S."

As Moscow seeks to de-dollarize its economy, China's yuan has become a larger part of Russia's foreign-currency reserves, increasing to 14.2% in March from 5% the year before, according to the Russian central bank. The shift helps boost trade further as Russia looks to do more business with China in yuan.

The alliance isn't without its challenges. Cooperation could be dented by a competition for influence in regions such as Central Asia. Russia's Far East has recently seen protests against Chinese-funded ventures, such as a water bottling plant on Lake Baikal and timber logging in the Siberian forests. Locals have dubbed the influx of visitors and enterprises a "Chinese invasion."

China's much-larger economy, eight times bigger than Russia's, gives it greater leverage in trade relations, while some in Russia see it as the junior partner in the relationship.

New access to Russian natural gas also gives Beijing leverage in the trade war with the U.S. by making China less reliant on America's generally pricier liquefied natural gas. Shipments of American liquefied natural gas were growing rapidly until China introduced a 10% import tariff last year. After Beijing raised the tariff to 25% in May, natural gas deliveries from the U.S. halted.

"Had the trade war not been there, the U.S. would have been a very promising gas supply growth source for China," Hou Qijun, president of PetroChina, China's top oil and gas producer, said in August, according to the South China Morning Post. The company is increasing its investment in Russian gas projects, Mr. Hou said.

When asked about the China-Russia energy trade, a company spokesmansaid it would "rationally buy [gas] according to actual demand and procurement costs."

Russia's entry in the Chinese gas market will continue to be a major obstacle to U.S. liquefied natural gas producers even if Washington and Beijing agree on a trade deal and lower energy tariffs.

"Once you put in the pipeline, its literally a sunk cost," said Anna Mikulska, energy fellow at Rice University's Baker Institute for Public Policy. "That will close some doors to U.S. LNG."

The Power of Siberia project, built and operated in Russia by state-owned Gazprom, will connect Siberian gas fields with China's northern industrial hubs, snaking through inhospitable terrain -- swamps, mountains and permafrost, in temperatures as low as minus 80 degrees Fahrenheit.

At the Atamanskaya compressor station, where the gas will be pressurized before it enters China 90 miles away, engineer Pavel Vesnin walked among dozens of valves and spigots and pointed to a white marker on the ground indicating where the 4-foot-9-inch-diameter tube passed below.

"The pipeline is so large that I can walk inside it almost without bending my back," he said.

The energy cooperation with Russia is augmenting Beijing's clout in the Arctic, where the U.S., Canada and others compete for shipping lanes and resources. China, which doesn't border the Arctic, now has a seat at the table.

Beijing has invested billions of dollars in Moscow's big gas projects in the Arctic to the north of the Power of Siberia pipeline. China's biggest ocean carrier, Cosco Shipping Holdings Co. entered a joint venture with its Russian state-owned counterpart, PAO Sovcomflot, to operate a fleet of ice-breaking gas tankers.

For years, the Russia-China energy partnership was one of unfulfilled potential, blunted by a history of suspicion and rivalry defined by differences in ideology and a competition for the leadership of the communist world. That included border clashes and a breaking of relations during the Cold War.

An oil pipeline, which had been under discussion since the 1970s, finally launched in 2009. Progress with the gas link also was slow, frequently hobbled by price disputes and lack of infrastructure.

Since the 2014 gas deal, Moscow has also increased its oil exports to China enough to challenge Saudi Arabia as the country's top crude supplier.

The Power of Siberia project will begin by exporting 5 billion cubic meters of natural gas this year and gradually ramp up to 38 billion cubic meters by 2025, the equivalent of Brazil's annual gas consumption.

China is expected to become the world's largest gas importer next year and account for more than 40% of global gas demand growth through 2024, according to the International Energy Agency. With Power of Siberia, Russia could fulfill nearly 10% of China's gas demand by 2024, according to IEA data.

The two governments are already discussing a sequel: a gas pipeline through Mongolia. The energy relationship is a sign of a broader geopolitical alignment, said Alexander Gabuev, senior fellow at the Carnegie Moscow Center think tank.

"Energy is win-win for Russia and China, both economically and strategically," he said.

--Stephanie Yang contributed to this article.

Write to Georgi Kantchev at georgi.kantchev@wsj.com

(END) Dow Jones Newswires

December 01, 2019 13:45 ET (18:45 GMT)

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