Bargaining Theory And Sino-Russian Energy Cooperation

The purpose of this research was to find an explanation of the differences in the process and outcomes of Sino-Russian oil and gas negotiations. The research question was why did the oil negotiations lead to a successful realization of the ’Eastern Siberia-Pacific Ocean’oil pipeline and resulted in growing exports of oil from Russia to China; whereas gas negotiations have stalled.The oil and gas negotiations were analyzed from three different theoretical angles, and applicability/non-applicability of each approach was identified with a provision of substantiation. Three bargaining theory models, which single out specific reasons for the more or less effective negotiations, were applied to the two cases. Three relevant hypotheses, based on Relative gains model, Best alternative to a negotiated agreement model and Shadow of future model, were tested on the Sino-Russia oil and gas negotiations:Hypothesis1was that Russia and China worried about relative gains associated with the potential agreements. Mutual concerns prevented them from making considerable advances in gas cooperative projects, but mattered less in oil negotiations, because the payoffs from such cooperation were more balanced.Hypothesis2was that Russia and/or China had significant alternative options in gas sector, which created obstacles to cooperative advancements. Oil negotiations proceeded more effectively, as the outside options were of less value.Hypothesis3was Russia and China at different stages of negotiations took into account the probability of future changes versus future stability of cooperation. At each stage it influenced the pace of the negotiations and level of interest of the parties in the negotiated agreement.Process-tracing method, using two-case studies analysis, was utilized in this research. The case studies were conducted as a disciplined-configurative type, which allowed for empirical contribution in the form of interpretation of the case with a theory, and theoretical contribution in a form of theory-confirmation. Analytic narrative and content analysis were used as operational mechanisms. Interviews, press accounts and documents were used to support the research. The analysis was placed in the context of the regional and global energy relations.Current energy situation in China and Russia was analyzed, and key imperatives of the energy strategies of the two counties as well as the role they attributed to one another in their energy security were identified. Process-tracing of the negotiations and cooperation developments in oil and gas sectors was followed by identification of main challenges and opportunities of such interactions and of the value the sides attributed to energy issues on their political agendas. The bargaining models (relative gains model; best alternative to negotiated agreement model; and bargaining in the shadow of future model) were tested on the vast factual and analytical material on the two cases of the Chinese-Russian oil and gas cooperation.The performed analysis revealed that current state of development of the Russia’s fuel and energy sector provides some major imperatives for the development of the internal and external energy policies. On the one hand, Russia has one of the largest mineral raw material bases in the world and can guarantee provision of the current and future demand of the Russian economy in hydrocarbons. On the other hand, traditional gas and even more importantly oil fields are depleted by more than50%, which provides for the necessity of shifting to the new exploration regions, including Russia’s offshore area.Russia primarily exports crude, however, development of the high value products export is one of the major tasks of the energy policy. Refineries and liquefaction plants are constructed by the major exploration sites. Russia’s major export directions for its energy products are Europe and the Commonwealth of Independent States. Russia’s energy strategy focus is geographical as well as product diversification and increasing the volumes of exports of energy products with high added value. The shift towards eastward diversification was witnessed with the launch of the Eastern Siberia-Pacific Ocean oil pipeline. The turn to the East is determined by the domestic need for the development of the Russia’s East Siberia and Far East, which includes major expansion of the gas transportation and distribution system. Eastern direction of the diversification policy is a part of the domestic and international development.Russia’s energy policy is based on a comprehensive program of the energy sector development defined in the "Russian Energy Strategy till2030". The strategy is a part of comprehensive social and economic development goals of the country and aims at securing most efficient exploitation of the energy resources and realization of the economic potential of Russia. The strategy implies gradual transition from the energy domination to the healthy share of the energy sector in the Russia’s economy.Russia’s approach to energy sector development is characterized by flexibility in terms of the set instruments and mechanisms of development; orientation both on the domestic and foreign markets; development of the oil and gas resources in non-traditional regions. Development of Arctic seas and Northern territories is a focus of the strategy. It is connected not only with (he policy of developing new regions’ resources, but with the energy security and sustainable development of the sector in the long-term perspective. Domestically energy policy is oriented at decreasing energy intensity of the economy and developing energy efficiency.International dimension of the Russian energy strategy is a part of the comprehensive approach. Russia aims at full integration in the world energy market and getting the most out of it for the national economy by maintaining stable relations with the traditional consumers of the Russian energy resources, as well as establishment of equally stable relations with new partners; intensifying dialogue with the states-importers of the energy resources, as well as states-exporters on bilateral and multilateral levels. The energy strategy implies engagement of international partners in the risk and problematic exploration and production projects on the territory of the Russian Federation, as well as strengthening positions of the leading Russian energy companies abroad.China plays a growing role in the Russian energy strategy. Russia’s approach towards energy cooperation with China developed within the frame of two key dilemmas resolved on the Russian side:exclusivity for China versus regional exports of Russia’s energy, and definition of the routes of the supplies.Russia’s approach to China in energy sector implies five main features:1. China is an important, but not exclusive consumer of the Russian energy exports in the Asia-Pacific region. The outcome of the Russia’s energy policy in the eastern direction will strongly depend on the success of the cooperation with China.2. Russia’s energy policy towards China is incorporated in the Russia’s strategy of development of Far East. Eastern energy policy direction has two interrelated goals-development of the energy resources of the region and access to Asia-Pacific markets.3. Russia plans to use export revenues and investments in infrastructure and development projects for the domestic developments.4. Russia welcomes joint projects with Chinese energy enterprises both on the territory of the Russian Federation and abroad. Potential opportunities for cooperation with Chinese companies in Russia’s offshore development projects are investigated. 5. The instruments of the realization of Russia’s energy policy towards China include both state level and the level of the energy companies, political initiatives, intergovernmental meetings, negotiations and contractual-legal framework, as well as bargaining leverages arising from the possibility of entering the markets of the other states of the Asia-Pacific Region.China’s energy policy main objective is regular trouble proof access to resources. The strategic character of the industry is derived from its utmost importance for supporting economic, social and political stability of the state. China’s leaders pursue well-directed policy of decreasing energy dependency of local economy. Emphasis is given to energy structure improvement, energy efficient economy with lower energy consumption per one unit of GDP, limiting effect of energy production and consumption on the environment.The priorities mentioned above are implemented through programmes covered by The Twelfth Five-Year Plan (2011-2015):expansion of electricity generating capacities and the national electricity grid; comprehensive development of oil, natural gas and new energy resources. Energy conservation projects and renewable energy resources are clearly advocated. Plans of energy structure improvement are developed introducing measures for gradual replacement of coal. Domestic resources are exploited actively.At the same time, local measures fail to solve the problem of China’s dependency on imported oil and gas. Programmes and statements call for comprehensive exploitation of domestic resources. But growth rates of China’s energy production continue to fall, while oil and natural gas import goes up and up.Heavy dependency on foreign energy resources makes China’s economy vulnerable to the performance of its suppliers. As a result, international dimension of the country’s energy policy is growing in significance.The international dimension forms a key part of China’s energy strategy and is implemented by the state energy corporations and political leaders of the country in their close collaboration. Over recent years, Chinese enterprises have been expanding their global activities, which now include exploration and exploitation, pipeline construction, participation in engineering projects, equipment export, oil and natural gas supply, shares in energy projects.The government of China proceeds with its policy of total diversification:supply routes and supply sources, direct access to resources of Central Asian countries and Russia, the Middle East and North Africa, North and South America. So far, in spite of political and economical measures, major part of energy resources comes to China from the Middle East and the Persian Gulf region. Diversification process is not limited to geography. The country plans to continue substitution of coal with cleaner energy resources. This may become an additional factor in favor of natural gas import.Russia’s role in the Chinese Energy Strategy is defined by its diversification policy. China uses available means of pursuing its policy in the Russian direction, which include political support, intergovernmental and business consultations, creation of legal framework as well as the use of financial and political leverages.The history of the oil and gas cooperation between Russia and China demonstrates the tendency of gradual rapprochement of the countries’energy policies. Initial cooperative discussions were based on the pre-existing positive factors of energy cooperation, such as relations of the structure of the relations in the’supplier-consumer’format, geographical proximity, correspondence of the needs of the two economies. In the course of cooperation development, political initiative and the establishment of regular dialogue formats played a crucial role in the promotion of mutual rapprochement until energy cooperation occupied a strategic place in the relations of the countries and formed one of the pillars of the Sino-Russian relations.Both oil and gas negotiations were influenced significantly by the internal developments in Russia and its desire to include cooperative projects in the frame of the domestic energy sector transformation. Political dialogue and mutual concessions (discounts and credits) had a positive impact on the development of the cooperation in both sectors. Involvement of the state and state companies on the Russian side brought an effect of stabilization and development of cooperation. However, the negotiations in the field of oil supplies went faster, whereas gas negotiations have experienced a series of shifts in positions and delays.Pricing remains the key issue of Russian-Chinese energy relations. Both partners try to strengthen their positions at negotiations through more active cooperation with third parties. For the People’s Republic of China these are the countries of Central Asia, for Russia—Japan and Korea. In shaping its energy relations with Russia, China makes them a part of a comprehensive approach to its energy security. A combination of measures aimed at improving energy efficiency and energy conservation, scientific approach to energy segment development, promotion of new technologies, extensive exploitation of domestic resources and forced occupation of foreign markets are meant to create a solid foundation for further sustainable social and economic development. The international dimension of China’s energy policy provides for filling in the gaps in domestic resources, ensuring energy security through diversification of routes and sources of supply, asset acquisition in foreign deposits.Stable growth and energy consumption volumes of China make the country one of the major players at the global oil and gas market. Russia has an opportunity to extend its activities in several directions:to add volumes of exported oil and gas, to draw China’s funds for development of joint infrastructure projects and exploitation of resources of East Siberia and the Far East. Highly qualified Russian technicians could take part in energy projects initiated by China. At the same time, Russia is only one of the players at China’s energy market facing serious competitors with similar geography. Thus, energy relations of Russia and China are a part of a general trend associated with formation of a common energy market of East and Central Asia.Energy cooperation between Russia and China not only strengthens their strategic partnership, but is also a part of the process of establishing a regional system of energy security in Asia-Pacific region.Relative gains did not play a considerable role in oil and gas negotiations between Russia and China. Shadow of future model also did not provide explanation for the differences. Although both models provided incites into the process of negotiations and factors needed to consider at different stages. We have developed a tracing analytical scheme for analyzing relative gains concerns, which worked on both of the cases. Important outcome of the relative gains model application is that relative gains did not play decisive role in the behavior of neither Russia, nor China. Both countries however proved to have been concerned with the’shadow of future’, and acted according to the model at each stage of the negotiation process. This implies that Russia and China take their energy relations perspective seriously. The deals are elaborated for long periods of time, and the sides take time to negotiate better agreements, albeit realization in the case of oil showed the relevant model proposition of a fast realization. The enforcement of the gas agreement when it is reached can be expected to be realized with political support and positive advancements.The model which provides an explanation is the principled negotiations formula of the Best alternative to a negotiated agreement. We can predict the behavior of the state by evaluating the value of its BATNA. China will prefer to wait with the realization of the costly infrastructure projects from Russia, or to load the burden of responsibility for the risks of their implementation on the Russian shoulders. The more China trusts to have BATNA in the future the less commitment it shows to the negotiated agreement. We can expect that until China considers Russia’s projects as her BATNA, China will take a firm stand in negotiations, by not providing sufficient credit or investment into the negotiated agreement.In the long-run Russia’s BATNA value will be decreasing; and the interest in reaching an agreement with China will be growing. Russia will be inclined to reaching an agreement as the time discount rate becomes larger. But as its time discount value is not high yet, it can allow for some time to negotiate. The risks are more of middle-range ones, and Russia would prefer to secure its position now in front of future challenges, but still has certain time availability to try to bring the position of the counterpart closer to the Russia’s preferred outcome.