Tue, Nov 5 2024 5 November, 2024

Power of Siberia 2 pipeline future hangs in the balance

The Power of Siberia 2 pipeline could carry as much as 50 billion cubic metres of gas per annum across 2,600 km.

Cape Kamenny on the Yamal Peninsula, in the far east of Russia (Photo: Wiki Commons/Vadimirushka)

Chinese and Russian geopolitical gamesmanship has been at the fore recently as both sides try to hammer out a price agreement for Power of Siberia 2 (POS 2) pipeline gas.

Those negotiations stalled in May, however, with hope on the Russian side that talks could be quickly restored. Nevertheless, other developments have sidelined POS 2 for several years, maybe indefinitely. In mid-August, the Mongolian government decided to not include the part of the pipeline that runs through its territory in its fiscal spending plan until at least 2028.

POS 2 is a joint project between state-run China National Petroleum Corp. (CNPC) and Russian gas giant Gazprom that will send gas from Yamal Peninsula reserves in Russia’s Siberia to Western China. Much of the reserves now earmarked for POS 2 were originally intended to be sold to EU customers.

The first Power of Siberia (POS) pipeline, capable of carrying 38 billion cubic metres (bcm) of gas per year, runs 3,000 km from gas fields in Eastern Siberia into Western China. It’s expected to reach full capacity within the next two years. Complicating matters for Russia, the first POS pipeline has been unprofitable since it began operations in 2019 because of lower prices demanded by China, several times below what Europe has paid on average.

Contentious deal

The POS 2 pipeline has been the most contentious deal between Beijing and Moscow for years. While both Chinese and Russian media have touted it as indicative of a new era of Sino-Russian partnership, nothing could be further from the truth. It’s simply showing how resilient Chinese negotiators can be while also underscoring Russian fossil fuel export vulnerability.

China has the upper hand since it has a plethora of gas supply options lined up well into the mid part of the next decade, including a growing list of LNG suppliers. Last year, the countries supplying the most LNG to China included Australia (34 percent of total LNG imports), Qatar (23 percent), Russia (11 percent), and Malaysia (10 percent).

China also imports gas via long-distance pipelines from three primary locations – central Asia, predominantly Turkmenistan, as well as Myanmar and Russia. China’s domestic gas production, including significant offshore development in the South China Sea, has also been increasing and now makes up nearly 60 percent of its gas supply.

Russia, however, has been scrambling to prop up its government coffers, particularly to help fund the war in Ukraine. The country relies on oil and gas sales for just over 20 percent of its national revenue, with that over-reliance exacerbated due to ramifications over its ongoing war in Ukraine.

Cutting gas flow

Russia first started cutting gas flow to EU members in a tit-for-tat retaliation against economic sanctions slapped on Moscow due to the invasion of Ukraine. It worked, at least at first, and sent Europe into an energy supply crisis in late 2022. And for good reason. Russia had been supplying some 40 percent of Europe’s gas before the war in Ukraine, according to World Economic Forum data. This amounted to more than 140 bcm of gas to the EU and UK per year, highlighting Russia’s gas supply monopoly.

While more work remains to be done to wean itself off of Russian gas, Europe has been pivoting to other energy sources, including more renewable energy and LNG imports. In 2023, Russia only supplied between 22-25 bcm of gas to the EU and UK, a fraction from its gas monopoly peak. In lockstep, Russia’s need for new gas export markets has given Beijing such an advantage that its pricing tactics caused the two sides to recently walk away from the negotiating table.

Stalled negotiations

Citing three people familiar with the matter, the Financial Times reported in June that attempts to conclude the POS 2 deal ran aground over what Moscow considered were unreasonable demands by Beijing on price and supply levels. Beijing reportedly pressed even more, asking Russia to pay close attention to heavily subsidized domestic prices, adding that it would only commit to buying a small fraction of the pipeline’s planned 50 bcm annual capacity.

Rajoli Siddharth Jayaprakash, a research assistant at the Observer Research Foundation (ORF), told Gas Outlook that China wants to squeeze Russia for the best gas deal. “At this point, gas from Russia is cheap at around US$250 per thousand cubic meters (although the final price is only known to Gazprom and CNPC), but China wants a better price. However, negotiations aren’t going anywhere. Seeing inactivity, and Chinese reluctance, Mongolia didn’t include the pipeline in its strategy for 2024-2028,” he said.

It also appears that stalled talks could alter future Sino-Russian political dynamics. Alexander Gabuev, Director of the Carnegie Russia Eurasia Center in Berlin, said in June that Russia’s failure to secure the POS 2 deal underscores how the war in Ukraine has made China the senior partner in the countries’ relationship.

Jayaprakash, however, offered a more nuanced take. He said that the junior senior element is cause for debate, but Sino-Russian relations are deeply asymmetric, favouring China even though in raw numbers there’s a slight trade deficit for China. He added that Moscow’s export basket to China is 36 percent in comparison to China’s exports to Russia, which are around 3 percent.

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