Energy & Resources

Oil cash floes

Chinese SOE wins major Russian Arctic contract


China makes Arctic energy play

In January of last year the Chinese government issued its first white paper on the Arctic.

It announced that China was now a “near-Arctic State” and that as a major power and stakeholder in the region, the Chinese would play a greater role in Arctic affairs.

The assertion came as a surprise to some: after all, China is no closer to the North Pole than Kazakhstan.

But Beijing’s argument is that what happens inside the Arctic Circle affects China directly. “The natural conditions of the Arctic and their changes have a direct impact on China’s climate system and ecological environment, and, in turn, on its economic interests in agriculture, forestry, fisheries, the marine industry and other sectors,” it said.

In recent years Chinese activity in the Arctic has increased, often with the assistance of the Russians, whose northern coast is almost entirely inside the Arctic Circle.

This year alone the Chinese have bought a 20% stake in Arctic LNG-2 (a Siberian liquefied natural gas project) and set up a joint venture with a Russian state shipping company for a fleet of ice-resistant gas-tankers

In April the Russian Academy of Sciences and Qingdao National Laboratory for Marine Science and Technology also agreed to set up a joint research centre in the Arctic region.

Another project – to build an oil processing plant in the Payakha field in northern Russia – has made headlines in the Chinese media, in part for what it says about the improved fortunes of state-owned China National Chemical Engineering Group Corporation (CNCEC).

CNCEC was founded in 1953 and it was one of the first companies to build overseas plants.

A few years ago it started to emerge that the company had financial problems and in 2017 its chairman was sacked by Sasac (the administrator of the country’s largest state-owned enterprises) and replaced with Dai Hegen – the former president of China Railway Group.

The Payakha contract is also seen as important because it is the first time a Chinese firm has been chosen as the lead contractor on an oil and gas project in the Arctic. It is also an interesting statement that the contract did not go to one of China’s big three oil majors (CNPC, Sinopec and CNOOC). There seems to be an underlying powerplay here to divvy up some of the energy spoils (key shareholders of CNCEC include coal giant Shenhua and the smaller state-owned oil firm Sinochem).

A subsidiary of CNCEC will build a plant in Payakha for the treatment of crude oil, a port for shipping 50 million tonnes of it a year, and a power station to keep things running. The Payakha field, located in the northern reaches of Krasnoyarsk, has probable oil reserves of 420 million tonnes and a possible resource of 2 billion tonnes – making it one of Russia’s largest fields if the fuller figure proves accurate.

The financial website Jiemian said the contract for the oil project was worth Rmb34.5 billion ($5 billion) – the equivalent of all other construction deals signed by the top three Chinese oil companies last year. Jiemian also referred to CNCEC as a “dark horse”, claiming that the signing of such a large-scale agreement is “very rare”.

One party that’s a lot less impressed by China’s claims to a fuller presence in the Arctic is the American government, whose Secretary of State Mike Pompeo laughed off Beijing’s self-proclaimed designation in May. “Beijing claims to be a ‘near-Arctic state,’ yet the shortest distance between China and the Arctic [Circle] is 900 miles,” he chided.

“There are only Arctic states and non-Arctic states. No third category exists, and claiming otherwise entitles China to exactly nothing.”

Speaking at a meeting of the Arctic Council in Finland, Pompeo also warned that China could use its claims on research in the region to strengthen its military presence there.

“We need to examine these activities closely, and keep the experience of other nations in mind. China’s pattern of aggressive behaviour elsewhere will inform how it treats the Arctic,” he said.

“Do we want the Arctic Ocean to transform into a new South China Sea, fraught with militarisation and competing territorial claims?” he added.

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