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Power of Siberia: China keeps Putin waiting for gas pipeline

by SuperiorInvest

Russia’s prime minister left China this week without a reward Moscow has long prized: Beijing’s clear commitment to Power of Siberia 2, a major gas pipeline project to transform energy flows across Asia.

Created over ten years ago to help Russia “turn east”, the pipeline through Mongolia to China was a way to diversify gas sales, boost revenues and give the Kremlin more diplomatic influence.

The project, first dubbed “Altai” after the mountainous region of southern Siberia, has taken on new urgency since the invasion of Ukraine as Moscow sought new outlets for the gas that flowed to Europe before sanctions stood in the way.

The snag for Moscow is that Beijing – a key economic partner since the all-out invasion of Ukraine – appears to be in no rush to get involved. It’s a reticence that analysts say shows how weak Moscow’s wartime bargaining power has become when dealing with an economically stronger neighbor.

Another Russian gas pipeline, the Power of Siberia, was launched in 2019 and is expected to reach its maximum capacity of 38 billion cubic meters per year by 2024. But that pipeline relied on the development of new gas fields in eastern Siberia, which has never sent fuel to Europe — less useful for Moscow’s diversification strategy.

In contrast, the PS-2 aims to supply China with gas from the northeastern Yamal Peninsula, which has historically supplied the European market through several pipelines, including Nord Stream, whose supplies stopped flowing in disputes with the EU even before its sabotage in 2022.

The search for alternatives has shifted from a strategic choice on the part of Russia to the only option.

“Beijing has a history of prolonging negotiations to get a better deal – this was the case when Power to Siberia 1 was negotiated,” said Alicja Bachulska, an expert on China policy at the European Council on Foreign Relations. “As Russia’s aggression against Ukraine has turned into a protracted war, Beijing believes its negotiating position vis-à-vis Moscow can only get stronger.”

Taking its time may allow China to secure a lower gas price through the pipeline, she added.

Sino-Russian talks on the pipeline intensified in the months leading up to the war. During the Beijing Olympics, Vladimir Putin and Xi Jinping signed a 25-year contract for the Far Eastern route and “definitely talked about PS-2,” said Tatiana Mitrova, a research fellow at Columbia University’s Center for Global Energy Policy.

But since then, while Russia has repeatedly emphasized its readiness to launch the PS-2, Beijing has been conspicuously silent. While a visit to the Kremlin in March, Xi bypassed PS-2 — while Putin spoke of the plan as a done deal, saying “virtually all the parameters . . . were completed”.

Mikhail Mishustin and Xi Jinping
Mikhail Mishustin, the Russian Prime Minister, left and Xi Jinping during a meeting at the Great Hall of the People in Beijing on Wednesday © Sputnik/Alexander Astafyev/Pool/Reuters

Careful not to become too dependent on one supplier, China is actively securing more natural gas contracts than it actually needs, said Gergely Molnar, a gas analyst at the International Energy Agency.

China relies on Russia for just over 5 percent of its gas supplies, he said. Together with a planned increase in supplies via existing routes from Russia, the PS-2 deal would increase this share to around 20 percent by the early 2030s.

China profits from the pipeline. It seeks to diversify the country’s energy sources, particularly land supplies from Russia and Central Asia, which would be safer than sea routes in the event of geopolitical or military tensions with the West.

“Gas transport is safer to go through Russia by land compared to [the] the far Middle East,” said Lin Boqiang, head of the China Institute for Energy Policy Studies at Xiamen University.

Alexei Miller, Vladimir Putin and Zhang Gaoli attend a ceremony to mark the welding of the first link of The Power of Siberia

From left, Gazprom CEO Alexey Miller, Russian President Vladimir Putin and Chinese Vice Premier Zhang Gaoli attend a ceremony to mark the welding of the first link of the Power of Siberia in 2014 © Alexey Nikolsky/RIA NOVOSTI/AFP/Getty Images

Reaching a deal against the backdrop of the war in Ukraine has geopolitical complications. But some experts on Chinese politics believe that a deeper energy partnership with Russia is only a matter of time.

“Nobody should really expect that China should cut off its access to Russian oil and gas,” said Victor Gao, vice president of the Beijing-based Center on China and Globalization. “This kind of trade is normal, it is a peaceful trade.

He said the huge energy trade between Russia and China “will ultimately lead to a reconfiguration of the world’s oil and gas supply. . . and the west should not be surprised”.

For Russia, the construction of PS-2 is the only way to compensate for at least part of the EU market that was lost. This market accounted for most of the gas produced from the Yamal Peninsula. But that means there is no particular incentive for China to agree to a new pipeline now.

Indeed, China has been busy developing additional ground supplies. At a summit with Central Asian countries last week, Xi Jinping pushed for the construction of the so-called D-line gas pipeline, which would be China’s fourth in the region to bring gas from Turkmenistan.

About 35 billion m3 of gas was exported from Turkmenistan to China via three gas pipelines last year. This is comparable to the 16 billion cubic meters that Russia sent through the Power of Siberia.

Even with the PS-2 pipeline in place, Russia would not be able to match what it lost in European sales. The price of this gas would also be lower. The gas sent by the first Power of Siberia pipeline – under conditions set at a time when Russia’s negotiating position was much stronger – is priced well below the European market rate.

Sergei Vakulenko, a former director of strategy for Gazprom, said Russia is not even matching the price China is paying to import pipelines from other suppliers.

Given these factors, PS-2 would generate an estimated $12 billion a year for Gazprom, of which the state would receive about $4.6 billion in duties and taxes, according to Ronald Smith, senior oil and gas analyst at BCS Global Markets.

This sum, equivalent to less than half of Russia’s average monthly energy income in 2023, would hardly be transformative. But the Kremlin is desperate for additional revenue as its budget deficit widens, its war costs rise and its European gas sales decline. Mitrova of Columbia University said, “This gas has nowhere to go.”

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