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Russia-China Energy Partnership Faces Uncertainty Over Pipeline Deal

  • Power of Siberia-2 pipeline would transport gas from Siberia to China, with geopolitical significance.
  • Moscow faces challenges in negotiating favorable terms with Beijing, given China's diverse energy contracts.
  • China prioritizes energy security and diversification, potentially affecting Russia's gas exports.
Russia China

Will Russian President Vladimir Putin finally be able to secure a Chinese commitment on an ambitious natural gas pipeline project that could transform energy flows across Asia?

Putin is expected to push for progress on the China-bound Power of Siberia-2 gas pipeline when he meets Chinese counterpart Xi Jinping in Beijing for talks and to attend the third Belt and Road Forum on October 17-18.

The proposed pipeline would bring gas from the huge Yamal Peninsula reserves in western Siberia to China, the world's top energy consumer and a leading gas customer.

Russian officials have in recent months met with their counterparts from China and Mongolia -- where the pipeline is intended to traverse -- with Russian Deputy Prime Minister Aleksandr Novak announcing in September that Power of Siberia-2's route is to be finalized after the trilateral negotiations.

In another sign that energy talks are advancing, Reuters reported that Putin is also expected to go to Beijing with the heads of Russian energy giants Gazprom and Rosneft, Aleksei Miller and Igor Sechin, respectively.

"It's striking to see both Miller and Sechin traveling with Putin, as well as the recent meetings with the Mongolians," Joseph Webster, a senior fellow at the Atlantic Council's Global Energy Center, told RFE/RL.

Putin's high-profile trip marks his first visit to China since Russia's full-scale invasion of Ukraine and comes as Moscow is trying to boost trade with Asia as economic ties with the West decline. China -- a crucial political and economic partner for the Kremlin amid the war -- is central to that diversification strategy and the Russian economy would get a huge boost from the new gas pipeline.

The catch for Moscow -- which needs the Power of Siberia-2 to compensate for at least part of the European Union market it has lost due to fallout from the war in Ukraine -- is that Beijing currently has no particular incentive to agree to the new pipeline.

Energy analysts say the proposed venture will need to overcome growing economic, financial, and technical challenges to come to fruition. Moscow's bargaining power with its more economically powerful neighbor has weakened over the course of the war in Ukraine and questions remain over Gazprom's ability to underwrite such a complicated infrastructure project.

Revenue from the pipeline is also uncertain because it faces competition from China's growing shift toward renewable energy.

Despite these mounting concerns, the pipeline could still get the green light, Webster noted, as a sign of Xi looking to prioritize Moscow's geopolitical importance to Beijing despite the risks stemming from the troubled economic outlook of the pipeline.

"The Russians have been pushing for an agreement for some time despite the economics being highly unfavorable," Webster said. "The Russia-China relationship is strong and both Xi and Putin appear intent to lay the foundations so it can outlast them as leaders."

What's At Stake For Putin's Trip?

Conceived of more than a decade ago as part of a Russian move to diversify gas sales to Asia, the pipeline has taken on a new dimension since February 2022, when European consumption started falling dramatically and forced the Kremlin to urgently find alternative buyers for its gas.

Discussions over the pipeline were already under way when the project was again discussed on Putin's visit to China during the Beijing Olympics just weeks before Russia's full-scale invasion of Ukraine. Since then, Moscow has continued to emphasize its readiness to begin construction on Siberia-2, though China has remained largely silent on the issue.

During a March summit, Xi appeared to skirt around the pipeline proposal, while Putin initially spoke about it as if an agreement had been reached, saying during public remarks that "practically all parameters...have been finalized."

This was walked back in a Russian statement at the end of the summit to show that it had been discussed but no deal was struck. Russian Prime Minister Mikhail Mishustin traveled to China in May and reportedly held discussions on the pipeline, but ultimately left without a clear commitment from Beijing.

Amid the ongoing talks around Power of Siberia-2, Xi has largely stood by Putin during the war in Ukraine. Chinese-Russian trade has soared since the invasion, and Russia has sold Asian powers -- including China -- greater volumes of the oil it can no longer sell to the West because of sanctions.

China and Russia already have the Power of Siberia pipeline, which was launched in 2019 and agreed between Putin and Xi in 2014 shortly after Moscow's forceful annexation of Kyiv's Crimean Peninsula and the outbreak of fighting in eastern Ukraine by Russian-backed separatists. That pipeline is expected to reach its maximum capacity of 38 billion cubic meters (bcm) per year by 2025 and is reliant on new gas fields in eastern Siberia.

In contrast, Power of Siberia-2 aims to supply China with gas from the Yamal Peninsula, which historically has pipelines bound for the EU market, including Nord Stream, which was a major source of dispute over the years before being sabotaged in 2022. According to Russian estimates, the second Siberian pipeline could carry up to 50 bcm per year.

While Putin may be feeling pressure to find new customers for the gas that flowed to Europe before the invasion of Ukraine, if China bides its time it may allow Beijing to secure a lower price for the gas transiting Power of Siberia-2, Jon Yuan Jiang, an Australian-based analyst of Chinese-Russian relations, told RFE/RL.

China and Russia have yet to agree on the terms of gas delivered via the new route, including pricing. Jiang notes that negotiations are complex and that further complications could arise over uncertainty about China's natural-gas needs after 2030, when its reliance on renewables is expected to rise and domestic gas consumption could be phased down.

Adding to this, Russia's ultimate revenue could be marginal compared to other pipeline deals struck by the Kremlin and would not be able to match what has been lost from European sales.

The investment firm BCS Global Markets estimates that Power of Siberia-2 would bring in $12 billion a year for Gazprom and send some $4.6 billion in taxes to the state. That latter amount is less than half of Russia's average monthly energy revenues in 2023 but very welcome amid the Kremlin's costly war in Ukraine.

China's Energy Strategy

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Beijing prioritizes its energy security and has been active in securing natural-gas contracts for larger quantities than it actually needs in order to avoid being too dependent on any one exporter.

Russian gas currently makes up a small portion of China's overall market, with overland pipelines that transit Central Asia from Turkmenistan -- as well as long-term contracts with Qatar, the United States, Australia, and other energy players for liquefied natural gas (LNG) making up the rest of its supplies.

Diversification is central to China's gas deals and Xi also offered support for the construction of the so-called Line D pipeline -- which would be the fourth to bring Turkmen gas to China -- during a summit with Central Asian leaders in May.

Alicja Bachulska, a China policy expert at the European Council on Foreign Relations, told RFE/RL that China has yet to signal "what its demand for Russian gas will be in the future" and that Beijing is hesitant about over relying "on Russia when it comes to gas imports."

She added that even if the pipeline were to be approved, "its full completion will take years and many more rounds of hard negotiations regarding pricing and other related issues" that would delay any impact on China's energy market and Russian state coffers.

The Atlantic Council's Webster notes that the pipeline's approval is far from a certainty and Putin's upcoming trip may see the Russian leader leave Beijing without a clear commitment on Power of Siberia-2. But he said China may still offer other forms of support during the trip to signal their close bilateral ties.

"China might be more willing to offer Russia benefits in other areas that are not natural gas," Webster said. "Maybe it's favorable terms in oil or nonlethal assistance in other sectors. China has lots of options to assuage Russia that don't involve Power of Siberia-2."

By RFE/RL

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Leave a comment
  • Mamdouh Salameh on October 16 2023 said:
    President Putin wouldn’t be visiting Beijing unless he was assured by his close strategic ally President Xi Jinping that the Spirit of Siberia 2 is going ahead.

    My analysis is based on the following factors:

    1- Energy security is the top priority for China, the world’s largest economy based on purchasing power parity (PPP). Russia through its oil and gas pipelines that traverse the borders of the two countries and also via the Northern Sea Route (NSR) which is the shortest and most reliable route to supply China with Arctic oil and LNG, underpin that security.

    2- And while China tries to diversify and also prioritize its energy imports and security, it is always alert to energy supply disruption via the Straits of Hormuz and Malacca if and when tension escalates with the United States over Taiwan.

    3- The fact that President Putin will be accompanied in his visit by the heads of Russian energy giants Gazprom and Rosneft, Aleksei Miller and Igor Sechin respectively, is a sign that the negotiations have reached an advanced stage.

    4- The power of Siberia 2 is of strategic importance for both China and Russia. For China, it will supply it with up to 50 bcm per year from the Yamal Peninsula once completed which will account for a big chunk of its gas needs. For Russia, it will enable it along with 38 mcm piped via the Spirit of Siberia 1 to virtually replace its previous gas exports to the EU.

    Dr Mamdouh G Salameh
    International Oil Economist
    Global Energy Expert

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