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    From the Editor: Power of Siberia 2 deal still eludes Russia [Gas in Transition]


Russia is strongly pushing for a 50bn m3/year gas pipeline to China, but Beijing remains non-committal. [Gas in Transition, Volume 3, Issue 3]

by: NGW

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From the Editor: Power of Siberia 2 deal still eludes Russia [Gas in Transition]

The visit by Chinese president Xi Jinping to Moscow on March 20 to meet with Russian counterpart Vladimir Putin was greatly anticipated. The trip – Xi’s first to the Russian capital since Moscow invaded Ukraine in February last year – had clear political importance for both nations.

Xi was able to promote Beijing’s 12-point peace plan for ending the war in Ukraine which it unveiled a month earlier, with the aim of portraying China as a constructive and responsible global power while pushing back against accusations that it is siding with Russian aggression. Putin, on the other hand, sought to demonstrate that despite Western attempts to isolate Russia over its war, it still has a strong partner that likewise opposes a US-led unipolar world.

However, the meeting did not yield Russia’s greatly sought-after prize – a contract for gas supply via the planned Power of Siberia 2 pipeline. That pipeline would pump an extra 50bn m3/year of Russian gas annually to China via Mongolia, from fields on the Yamal Peninsula that until recently were major sources of supply for the European market.

The same sticking points

Discussions about a second Russia-China pipeline have gone on for years – long before the Power of Siberia 1 pipeline was launched at the end of 2019. Power of Siberia 1 shipped 15.4bn m3 of gas in 2022, up 48% yr/yr, and is expected to deliver 22bn m3/yr in 2023 and ramp up to its full 38bn m3/yr capacity by 2027.

The sticking points in negotiations on Power of Siberia 2 appear to be the same that held up talks on Power of Siberia 1 – namely, who should finance the construction of the 2,600-km pipeline and at what price the gas should be sold.

Beijing is well-placed to drive a hard bargain. China enjoys diversified gas supply in the form of LNG imports from various global suppliers, as well as pipeline deliveries not only from Russia but also Turkmenistan and Myanmar. If Russia refuses to provide sufficiently generous terms, Beijing has other options to expand its imports.

On the other hand, Moscow’s negotiating power is weaker than ever before. It has lost most of its European gas market share and desperately needs another outlet for that supply. It is looking to expand deliveries to Central Asia, but volumes will pale in comparison to the amount of gas it used to ship to Europe, and prices will be far less lucrative.

Meanwhile, Russia’s ambitious growth targets for LNG production are unlikely to be met, given that that sector has been highly dependent on Western technology, equipment, know-how and financing that is no longer available.

That leaves China as the only realistic option for Russia to export anything near as much gas as it used to sell in Europe.

While the contract’s pricing details have never been publicly disclosed, various media have reported that China must take or pay 85% of contractual supplies every year, and that the price is tied to the price of oil products with a nine-month lag. In the years after the contract was signed, Moscow tried in vain to get Chinese financing to build the pipeline. But in the end, Russian banks had to step in.

When Beijing and Moscow signed the long-term gas supply contract that underpinned Power of Siberia 1’s construction in May 2014, Russia was also beset with economic woes as a result of low oil prices and sanctions that the West imposed in response to its annexation of Crimea. Now its problems are far greater. It is a pariah state, its economy potentially faces years of stagnation and its gas export industry is in tatters. In short, the mismatch between Russia and China’s bargaining power is far larger. The fact that a supply contract for Power of Siberia 2 has not yet been agreed, though, may signal that Moscow is still holding out for better terms than Beijing is prepared to provide.

Nevertheless, Russia’s government now hopes that a deal can be reached before the end of this year, deputy prime minister Alexander Novak said on March 23.

The view from Beijing

Natural gas is set to play a critical role in China’s energy transition pathway, and domestic production growth will not keep up with the steep rise in demand over the coming decades. So there certainly is scope for China to receive a lot more Russian gas in the future, but the question is how soon.

The Kremlin envisages supplies reaching close to 98bn m3/yr by 2030. This would include flow not only via Power of Siberia 1, where Gazprom has suggested capacity could be expanded to 42bn m3/yr, and Power of Siberia 2, but also additional supplies via the Far East.Weeks before the war in Ukraine began, Beijing and Moscow signed an intergovernmental agreement on gas deliveries from fields off the coast of Sakhalin island via a new Far Eastern pipeline, and supplies are expected to reach 10bn m3/yr by around 2026.

Given the smaller scope, a contract on these Far Eastern supplies may be easier to agree than a deal on Power of Siberia 2. But Moscow’s priority seems to be a Power of Siberia 2 contract, not only because of the greater volume at play but likely because the fields that would feed the pipeline with gas have already been developed for the European market. To fill the Far Eastern pipeline, on the other hand, Gazprom would need to invest significantly in new upstream development.

A lot will depend on how quickly Chinese gas demand ramps up, which given the current economic volatility is difficult to predict, but also how comfortable Beijing is about relying on Russia as a key energy partner. After all, Russia’s weaponisation of gas supply to Europe over the past year will not have been ignored by Beijing. Another stumbling block in negotiations could be Chinese demands for control of Russian upstream assets.

And as stated earlier, China has other options. China’s state-owned PipeChina notably began work on the Chinese section of the 30bn m3/yr Line D pipeline from Turkmenistan in September last year, although how quickly the project will be finished is uncertain. China has also been signing LNG import contracts at breakneck speed over the last two years, which represent a more flexible source of supply than large pipeline projects.

In short, things do not look good for Russia. If Russia gets its pipeline deal in the near future, it will be on China’s terms, and it could fall on Russian banks to finance construction work. And Beijing could defer the project for a later point, if at all, as it pursues more flexible and less risky options for extra supply.