Breakthrough to Asia is impossible
In economic terms, the negotiations were determined in advance by the fact that there are no logistical possibilities for increasing oil and gas supplies to China. In terms of oil, there is a limited capacity of the Eastern Siberia – Pacific Ocean oil pipeline (and at the far end – the port of Kozmino, from where tankers go to China). The capacity of this route is 80 million tons per year, but not only China is at the other end – tankers go to Japan and other Asian countries. In addition, two oil refineries take oil from this pipe: in Khabarovsk and Komsomolsk-on-Amur. A small pipe runs through Kazakhstan from Omsk and Pavlodar, where Rosneft receives 10 million tons per year.
The increase in supplies is due to the fact that the Chinese drive large tankers to moorings in the Mediterranean Sea, then in the Black Sea from Novorossiysk they buy Russian oil through traders at a price well below the ceiling, reload it at sea into their large tankers and take it either to China or to other Asian countries, and Iranian oil is added along the way. Any increase in Chinese imports of Russian oil is determined only by these schemes – not the most efficient, but working.
As for gas, there is no other pipeline in China yet, all gas supplies will go only through the Power of Siberia. This year, it can deliver 22 billion cubic meters, and it will reach its design capacity of 38 billion cubic meters only in 2025 – no more progress is expected. As a result, China as a consumer cannot take the place of the European market.
China as a consumer cannot take the place of the European gas market
In addition, China has an established import model, its plans are clearly marked, and there is no Power of Siberia 2. The plans include receiving from Russia 38 billion cubic meters over 30 years through the Power of Siberia, as well as 10 billion cubic meters through the Far East via the Sakhalin-Khabarovsk-Vladivostok pipeline. China is counting on the extraction of its own gas (including from shale rocks), on imports from Central Asia, Malaysia, and on liquefied natural gas. Often this is Chinese liquefied natural gas, which is produced by Chinese companies, liquefied in different countries of the world, and this gas already belongs to them. Everything is planned there for several decades ahead, and there is no place for Russian gas there.
The Russian president has an old dream – to connect the gas transmission networks in the east of the country with the western ones in order to transfer gas volumes from Europe to Asia and vice versa, where it will be profitable. Imagine Putin, who comes to the Chinese leader and says: “We want to build a huge pipeline for you, but we have a plan to transfer these volumes either to you or to the Europeans, where it will be beneficial for us.” And what will be his answer to such a tempting offer from Xi Jinping? As a result, all persistent attempts to convince China of the need to build a new pipeline through Mongolia remain unanswered.
The situation is no better with other alternative directions. Turkmenistan has been working in India for a quarter of a century with a project to export its gas through Afghanistan and Pakistan. Why throw a Russian pipe there as well? Iran is not suitable for this, because according to Iranian laws, foreign companies cannot own either gas or oil on Iranian territory. Therefore, it will be necessary to sell gas to Iran, then negotiate that it sells the gas as its own and shares the profits with those who supplied it. This is way too complicated. The Turkish Stream is going to Turkey, which was hardly agreed upon at the time. Turkey absorbs gas from the Blue Stream through the Black Sea, and one pipe with a capacity of 16 billion cubic meters per year crosses the Bulgarian border and goes on to the European Union. Serbia and Hungary are currently sitting on it.
Russia left Europe on its own
It is worth recalling that Gazprom left Europe on its own. Arbitration claims are now being filed against Gazprom because it failed to fulfill its contractual obligations and left this market. If there is political will, then there will be enough pipes. There is a pipe through Finland, closed by Russia. There is a pipe through Belarus and Poland to Germany, closed by Russia. There are Ukrainian pipes. It is necessary to ask not from the Europeans, who allegedly do not want to buy Russian gas, but from the Russian leadership, which ordered Gazprom to commit suicide.
Russian leadership ordered Gazprom to commit suicide
Throughout the winter, the Russian layman was drawn pictures of freezing Europe, and when Europe survived the winter quite successfully, they began to say that it was saved by the weather, so much gas was not needed.
In fact, firstly, Europe has learned to save gas by reducing demand by 21%. There is an introduction of energy-saving technologies, the development of the use of wind, solar and biofuels. Secondly, they refused to decommission nuclear power plants and abandon coal-fired generation. Temporarily stepping on the throat of their "green" song, Europeans burn coal to generate electricity. An important step was spending more money on the import of liquefied natural gas, for this they began to build new terminals, transfer gas pipelines across the borders of EU member states. All these issues have been resolved, and Europe is ready for anything.
When forecasts are heard in Russia that Europe will lack 30 billion cubic meters of gas next year, it turns out that they think wrong. Europe can do without Russian gas next winter, and two winters later. Yes, you may have to lure liquefied gas from the Asian market with high prices. Yes, you will have to spend more, but you definitely won’t have to freeze or force your industry to suffocate without gas.
Europe can do without Russian gas next winter, and two winters later
Oil production cuts are not voluntary
Russia has announced a 500,000 barrel per day cut in oil production. When they say that it is voluntarily cutting oil production so as not to irritate the market, this is not true. Russia now and can not produce more oil. Russia did not reach its production quota, agreed with partners in OPEC +, by exactly half a million barrels per day. "Voluntary downsizing" is simply an admission of fact. The market is well aware of this. When Russian representatives announce that we are extending this measure, the market should react by raising prices: “Oh, there will be a shortage. Ah, we can’t do without Russian oil,” which means that prices should creep up. And prices are falling. They reacted to the decision of the US Federal Reserve to raise the refinancing rate to 5%. And it was this that influenced prices on the world oil market, but not Novak's statement .
Russia's position in OPEC remains decorative. They perfectly understand that this is a country that, for objective reasons, is not able to quickly reduce or increase production in such a way as to influence the market. Cartel collusion is a manipulation with production volumes, and Russia is not capable of this. Most oil wells are weak, the oil is heavily watered, the wells produce two buckets of oil per day. They are more expensive to stop and eliminate, and then it is impossible to restore. Drilling a well next to the same reservoir, where there is more water than oil – this is how our oil industry looks like. In Saudi Arabia, a well produces 1-2 thousand tons of oil per day, while the average Russian well produces 9.5 tons per day. There is no flexibility here. But there is a lot of symbolic pride – you see, in our alliance there are two of the three largest oil producers out of three: Russia and Saudi Arabia. This is pure decoration.
Sanctions start to work
As for the shortage of Western technologies as a result of sanctions, there is no catastrophe here. The companies that created the service industry in the Russian oil and gas sector – Halliburton, Baker Hughes and others – left Russia and left their personnel, training centers, research centers, advanced equipment manufacturing enterprises here … And all this is still working. There are purchases of equipment in China.
Yes, certain things are impossible without Western technologies. For example, for offshore seismic exploration, there is clearly not enough equipment, ships, or drilling ships to work on the shelf. Difficult situation with chemicals and other fracturing materials. To stimulate oil production, Russian companies did thousands of so-called fracking operations a year. Difficulties arose there because the equipment for fracking is not produced. For all the time in Russia, only three complexes were built, and dozens, if not hundreds, of them are needed.
The difficulty with oil refining is that, bypassing the sanctions, it is necessary to look for catalysts. There are difficulties with the assessment of explored reserves. With the participation of foreign companies, samples, seismic survey results and other subsurface studies were simply sent abroad, they were studied in laboratories and conclusions were drawn about what could be done with it. This joint work with foreign investors no longer exists. I would call it the beginning of the end. Back in 2018, the Ministry of Energy openly warned the State Duma that if it continues like this, then by 2035 oil production in Russia will fall by 40%, because the remaining reserves are increasingly unprofitable and hard to recover. Who will go there?
The big problem is tax instability. Tax systems in the oil industry change several times a year. You discovered a deposit and proved that something can be done there. From the moment you start developing a field until the moment when the project will be profitable, it takes you from seven to fifteen years. Which oil company will invest in a project that will start to pay off in 10-15 years? There are no such daredevils. It should be a state-owned company like Rosneft, which has different business principles – they earn not on the final result, but on cutting the allocated budget in the process of work. A gigantic budget is allocated for an absolutely unprofitable project in the future, and while these funds are coming, they are sawing them. Commercial companies do not work like that – they have to report to shareholders.
The sanctions themselves change over time and generally work. It was believed that Russia would lose half of its oil exports from December, and almost 70% of exports from next March. Then they decided to introduce a price ceiling mechanism so as not to create a shortage. The price ceiling is on. And it works so well that if we look at the Ministry of Finance data for January and February, we see that Russian budget revenues from oil and gas fell by 46% in both January and February. Because of this, the entire revenue side of the budget was reduced by a third. This is how sanctions work. Yes, you can say that oil ends up coming at a good price to India or somewhere else, but the whole difference between cheap oil sold below the ceiling somewhere in a port and oil that goes somewhere is appropriated by companies , which are associated with Russian suppliers, and all the money remains abroad.
The sanctions themselves change over time and generally work.
Now there is a flurry of activity to withdraw money from Russia. To whom is the war, and to whom is the mother related – "let's make good money here, especially since no one really controls." Oil companies have made themselves daughters abroad, to whom they sell oil at a low price, and they continue to wind up – and the money remains in foreign accounts.
War financing and bottom line
As a result, the financial capacity of the Russian government to continue the war is greatly reduced. In order to feed the war with money – mostly not even with currency, but with rubles that are paid to the army and the defense industry – you need to have an influx of money from somewhere. But it is not there, because the expenditure part of the budget is growing by 70%, and the revenue is reduced by a third. As a result, apparently, the ruble will depreciate – in order to reduce the deficit, they will sell gold and yuan from foreign exchange reserves, they will rip off companies that still have some money left. Gazprom, in addition to any taxes, was ordered to contribute 50 billion rubles to the state budget every month “just like that” – this is not in the tax code. Other companies were told: "Let's give us another 300 billion rubles, otherwise we have a deficit."
At a meeting of the Russian Union of Industrialists and Entrepreneurs, Putin processed them, but he was categorically told: “If you want to receive this money, make these changes to the Tax Code so that it is mandatory for companies and entrepreneurs.” As soon as the word “voluntarily” appears, enterprises and companies face the threat of sanctions. Nobody wants to be a "sponsor of the war", so they don't want to make any voluntary donations. Maybe they will start introducing a state loan again, that is, give out part of the salary in pieces of paper with a promise to repay them. There are various ways to reduce the budget deficit, and some of these methods are already being used.
No one wants to be a "sponsor of the war", so there will be no voluntary donations
Bottom line, the top Russian leadership has no rational plans. Xi Jinping arrived, sincerely wanted to “work” Putin and create conditions for peace, or at least a truce, so that later he could call Zelensky in Kiev and say: “There are such proposals, and China plays a prominent role here.” But Xi realized very quickly that it was impossible to talk to this man – he behaves like a madman. First, second, third, fourth plans were announced, but they all turned out to be stupidity and empty talk, like everything that comes from Putin, whose behavior defies any logic.
A person who says that he is fighting the West is doing everything to strengthen the West. He works for the US and NATO, and exhausts Russia in every way.
