Western commentators have made much of last year’s natural gas energy deals between Russia and China, likening them to the beginning of a powerful and menacing energy alliance dead set against the United States, its Asian allies, and the rest of the West. In May 2014, after a decade of drawn-out negotiations, China National Petroleum Corporation and Russia’s Gazprom (the privatized iteration of the former Soviet Ministry of Gas Industry, in which the Russian government continues to hold a majority stake) signed a deal to deliver 38 billion cubic meters of Eastern Siberia natural gas to Northeast China over a period of 30 years and at a cost of U.S.$400 billion dollars. Later, at the Asia-Pacific Economic Cooperation conference in Beijing last fall, just as Chinese leader Xi Jinping and President Barack Obama were signing an environmental accord to moderate fossil fuel consumption and combat climate change, Russia and China announced a follow-up deal in which some 30 bcm would be delivered from Western Siberian gas fields to China’s pipelines. These fields currently export to Western Europe; the new deal adds to a secure, steady source of natural gas from Kazakhstan and Turkmenistan to Western China. Although the pricing of the second deal has yet to be determined, if it is priced similarly to the first, the two accords could start putting as much as $725 billion into Russian coffers as early as 2020 and lasting over the next three decades. This amounts to nearly 30 percent (U.S.$25 billion) of Russia’s official military budget each year.
Small wonder, then, that Western security experts are concerned. Last year’s Sino-Russia gas energy deals pack the economic clout to enable significant modernization and expansion of the Russian military. They also have the potential to more closely intertwine two UN Security Council permanent member-states who are already inclined to impede Western international agendas. But amidst all the talk about geopolitics and powerful countries opposing the U.S. and its allies, Western commentators have lost sight of the humanitarian ends for which the gas deals were designed. These deals provide the equivalent of emergency surgery to correct an enormous mistake made in Chinese central planning—one that is costing as many as a quarter million Chinese per year their lives. Besides enhancing national energy security, they are aimed at improving access to energy and securing better quality of life for many Chinese citizens.
The planning mistakes that prompted the deals fall strongly along Chinese regional lines. Ever since post-Mao reforms began in 1978, the focus of the country’s energy planning has been to direct investments in power generation toward the dynamic, export-driven economies of South and Southeastern coastal China. These communities comprise the 300 million people of Guangdong, Fujian, Zhejiang, and Jiangsu provinces, and Guangzhou and Shanghai municipalities. Poor in fossil fuels, these regions initially depended on coal shipments by rail and boat from Northern and Northeastern China. The regions then increasingly supplemented demand with nuclear power, along with liquid natural gas from Qatar, Australia, Indonesia, and Malaysia. In 2000, the region’s energy sources diversified further with the addition of three enormous West-to-East gas pipelines carrying conventional natural gas from Kazakhstan, Turkmenistan, and Western China’s Xinjiang. As the world has since witnessed, these infusions of critical investments created an advanced energy infrastructure capable of supporting one of the most dynamic and export-driven economies in the world.
Meanwhile, the Chinese central government and the local governments of the North and Northeast followed the cheapest strategy to develop their own energy infrastructure to fuel industry and residential power: coal. When tens of thousands of miners were dying in small, dangerous underground mines owned by county and township coal companies in the North and Northeast, the central government responded by shutting down or consolidating the underground mines, tightening up safety and accountability, and making its own investments in large-scale open-face coal mines. The result was a power generation system that was highly stable and low-cost. Unfortunately, coal power generation—combined with reliance on small coal bricks for winter heating and year-round cooking as well as transportation shifts to individual cars and trucks—caused air pollution in Northern and Northeastern cities to increase exponentially. Shenzhen, a city of seven million created next to Hong Kong in the 1970s, gets its power from nuclear and LNG, and thus has some of the cleanest urban air in China. Beijing, by contrast, came to have half of its days reporting “unsatisfactory” air pollution levels, with 20 percent of the days reporting “very unhealthy” or “hazardous” levels in 2014. Such a situation is both a tragedy and a national embarrassment.
Beijing municipality has already shut down most of its traditional big polluters in heavy industry, including Capital Iron and Steel, and made enormous investments in a comprehensive subway system and electric and natural gas buses. But even with these actions, the city government’s development goal of becoming a “global city” is fading away and fast becoming unachievable. Expatriates and wealthy Chinese are not moving to Beijing; instead, they are fleeing it. Chinese central government leaders have started two major initiatives to clear the air. The first is on the supply side: bring cleaner fuels to Beijing and all of the surrounding provinces, areas not well connected to either LNG from overseas or pipelines from major sources of conventional gas in Western China. Hence the first Russia-China gas deal, designed to “gasify” China’s Northern and Northeastern local economies and replace coal with cleaner fossil fuels. The second strategy, on the demand management side, is creating an enormous impact even as it goes largely unnoticed by Westerners. Beijing is introducing coal quotas on each province, increasing carbon taxes, and enacting a complete ban on coal starting in 2020 in the capital itself and, soon after, in surrounding regions as well.
In the summer of 2014, Beijing municipality announced it would shutter all coal power plants by 2016 and build new natural gas facilities at a cost of billions of dollars. And since Beijing’s bad air quality largely comes from the factories and homes of surrounding Hebei Province, central authorities have approved the formation of a regional government subordinating both Hebei and nearby Tianjin municipality to the planning authority of Beijing, creating a macro-region planning authority. Coupled with an extension of the anti-corruption campaign, which recently has seen the elimination of some 55,000 “phantom officials” in Hebei Province alone, it seems easy to predict that strengthened Beijing local government will soon be shuttering polluting factories in surrounding areas as well. With a series of strokes of the pen, central leaders have created a new macroeconomic planning region that controls more than 100 million people in Beijing, Tianjin, and Hebei Province. If past history is any judge, it seems likely that the Chinese government will eventually approve adding in more localities to the new macroeconomic planning region if such a restructuring does not produce a better environment in Beijing. Such a new region will likely include the 300 million people of nearby Shandong, Liaoning, Jilin, and Heilongjiang provinces.
Western observers and policymakers must look beyond the geopolitical and see the Russia-China energy deals for what they truly are: a massive restructuring of China’s economic planning system and central-local government relations in order to correct a costly mistake that left the North and Northeast painfully dependent on the dirtiest of fossil fuels. Cleaner fuels from Russia have the potential to improve the lives of hundreds of millions of Chinese, and to also add the 400 million people of Northern and Northeastern China to the 300 million people of Eastern and Southern China who are already consuming cleaner fuels for their power needs. Perhaps when this is achieved the remaining 600 million Chinese citizens who live in interior regions and in far greater poverty will have a clearer roadmap forward into the future, along with a series of incentives to improve their own emerging urban environments through cleaner fuels and renewable energy. Such an outcome can only benefit everybody, everywhere.