Russia’s Power of Siberia 2 pivot raises questions

Developments are underway that will likely see more energy tie-ups between Russia and China including the Power of Siberia 2 pipeline, however closer association could present new problems as Russia seeks to pivot away from Western influences.

Russian energy minister Alexander Novak said on state television last month that its Nord Stream 2 pipeline will be “replaced by an alternative gas pipeline” to China, referring to the Power of Siberia 2 pipeline (POS2). He added that it’s something Moscow and Beijing have discussed for several years.

Russia and China could soon sign a deal to deliver 50 bcm of gas per year via the proposed pipeline, Novak said.

Gazprom’s Nord Stream 2 pipeline has been caught in the ongoing geopolitical standoff between Russia and the West. Completed last September, it consists of two lines, and would double total Nord Stream capacity from 55 bcm to some 110 bcm per year.

Germany suspended the pipeline’s certification following Russia’s invasion of Ukraine in February, and it’s not likely to be commissioned in the foreseeable future, at least until the war comes to an end and repairs are made.

Novak’s remarks also come as controversy over the Nord Stream 1 pipeline continues. Flows from the pipeline that runs from Russian gas fields, under the Baltic Sea, into Germany, were initially trimmed, then cut again and finally reduced to zero in August.

Several pipeline explosions on September 26, which the West claims were an act of sabotage,  along with subsequent leaks, indefinitely put the pipeline out of action. Explosions also hit part of Nord Stream 2.

Before the disruptions, EU members relied on Russian gas supply for around 45% of its gas needs, with Germany, the bloc’s largest economy, relying on Russian gas for as much as 55% of its usage.

Now, Russia wants to export more gas to Asia and particularly China to offset the losses.

Sino-Russian energy geopolitics

Russia’s first gas pipeline into China, the $400 billion Power of Siberia 1 (POS1), some 2253 km in length, became operational in December 2019.

It supplied 11 bcm of gas to China last year and will reach full capacity of 38 bcm by 2025. POS1 gas will displace coal in China’s northwest region in the long-term, according to a US Congressional Research Service report, helping Beijing’s coal to gas pivot as it seeks to bring the country’s total carbon emissions to peak by 2030, while trying to reach its net-zero goal by 2060.

Similar geopolitical dynamics that are currently underway in Europe also set the backdrop of the POS1 pipeline. Pressure from Western sanctions on Russia during its first invasion of Ukraine in February and March 2014, along with its annexation of Crimea, forced it to open a new market for gas.

Russia and China had been talking for several decades about a gas pipeline prior to signing the POS1 deal in May 2014 but had continually failed to reach a pricing agreement.

The agreement raised security concerns in Washington and Brussels over how a new Sino-Russian energy and geopolitical alliance could play out.

However, Power of Siberia 2 is also raising questions, especially about what it would mean for Europe and Asia, which over the past year have seen supply and pricing dynamics become more closely aligned.

Extra Russian gas will also see China become a more robust secondary LNG trader as it procures the fuel at discounted prices with the ability to re-sell on the spot market at much higher rates – a practice that its state-run energy firms and utilities already engaged in for much of the year as it sent volumes to gas-starved Europe.

At first blush, it seems that increased energy supply cooperation between Russia and China is mutually beneficial for both countries. Russia, for its part, further diversifies its gas exports amid a changing landscape with Europe, while China adds more gas to its energy supply mix and also strengthens its strategic relationship with a growing ally that will help its hegemony pursuits in the Asia-Pacific region.

Limits on cooperation

However, it has to be asked if it’s the right move for both countries at the current time and who holds the advantage.

James Waddell, an analyst at Energy Aspects told Gas Outlook that “China will again have a very advantageous position in negotiating future gas deals with Russia given the lack of alternative buyers.”

“This was also the case in 2014 when negotiations started over building the POS1 pipeline following Russia’s first invasion of Ukraine,” he said, adding that the most likely gas projects to get sponsored by China will be pipeline projects for direct delivery, including Sakhlalin-Vladivostock (around 2026) and POS2 (around 2029).

He added a cautionary note for China however, stating that Beijing will not want to become overly reliant on Russia as a single source of gas supply so there will be limits on this cooperation.

“China will also not want to face competition from international buyers for Russian gas and this makes sponsoring Russia’s LNG ambitions less attractive,” he said.

​A Center for Strategic Studies (CSIS) report from May concurs. “Power of Siberia 2 is the most coveted prize for Russian energy strategists,” it says, while “the main idea is to link the [Russian] fields in West Siberia, which now supply Europe, with Asia, while POS2 would allow it to arbitrage between European and Asian markets.”

“China holds all of the cards in the negotiations,” it adds, and “like the first POS line, China will drive a hard bargain, mainly due to Russian desperation.”

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