MOSCOW: Russia and China appear to be making headway toward a new gas pipeline that analysts say would help both countries hedge against growing tensions with the West.
On Wednesday, presidents Vladimir Putin and Xi Jinping held a video call in which they presented a united front on issues ranging from the US-led Aukus partnership, the Biden administration’s recent Summit of Democracies and Nato’s expansion to the east.
Yuri Ushakov, Putin’s foreign policy adviser, said the leaders also spoke about the Power of Siberia-2 project – a proposed mega-pipeline through Mongolia that could deliver up to 50 billion cubic metres of Russian gas to China annually.
Just one day later, Putin hosted Mongolian President Ukhnaagiin Khurelsukh at the Kremlin to discuss the progress being made on Power of Siberia-2 among other issues.
Afterwards, the Russian president told reporters that the pipeline’s optimal route, length and other parameters had already been determined, and that its feasibility study would be completed in the next several weeks.
Although Moscow and Beijing still have to agree on pricing for Power of Siberia-2 before construction can begin, industry watchers told Nikkei Asia that the two sides look to be closing in on a deal.
They predict that the long-awaited pipeline will not only significantly boost Russian gas exports to China – which has faced severe energy shortages this year – but also reduce Moscow’s dependence on European markets and Beijing’s reliance on maritime routes controlled by US warships.
“The advantage is very obvious: Russia has the energy resources and China has the market,” said Lin Boqiang, dean of the China Institute for Studies in Energy Policy at Xiamen University.
“So, I think Russia and China will reach a final deal for Power of Siberia-2 sooner rather than later, and possibly even more projects are coming if Russia can sell more gas.”
Over the past decade, natural gas has emerged as one of the main areas of economic cooperation between the neighbours.
In 2014, Russia’s Gazprom and the China National Petroleum Corporation signed a US$400 billion deal to build the Power of Siberia-1 pipeline, a 2,200km route connecting northern China with gas fields in eastern Siberia.
The pipeline was launched in late 2019 and is expected to supply China with up to 38 billion cubic metres of gas a year once it reaches full capacity in 2025.
Chinese state energy companies and government-backed investment funds have also thrown their weight behind several ambitious Russian projects to extract liquefied natural gas in the Arctic.
Since 2013, Chinese investors have acquired a roughly 30% stake in the US$27 billion Yamal LNG project and a 20% stake in the US$21 billion Arctic LNG project, both of which are spearheaded by Russian gas company Novatek.
For years, the two countries have discussed building a second Power of Siberia pipeline, which would more than double Russian gas exports to China, but with little progress.
Negotiations initially stalled over Beijing’s reservations about Gazprom’s preferred route, which proposed delivering gas from Western Siberia to China’s Xinjiang Province across the Altai Mountains.
In late 2019, Gazprom relented and agreed to pursue an alternative route favoured by Beijing. This would transport the gas directly to densely populated regions of central China through Mongolia.
Since then, the Russian state gas conglomerate has moved to finalise a deal with Ulaanbaatar for the Mongolian portion of Power of Siberia-2, known as the Soyuz Vostok pipeline.
During the first four months of this year, Gazprom registered a subsidiary company in Mongolia and launched a feasibility study for the project.
In late October, Gazprom and the Mongolian government announced they had reached an agreement on the exact route for Soyuz Vostok.
Mongolian Deputy Prime Minister Sainbuyan Amarsaikhan told reporters in November that he expected construction on the pipeline would likely begin in 2024 after two years of design and preparation work.
Alexander Gabuev, a senior fellow at the Carnegie Moscow Center, told Nikkei that the recent moves with Mongolia indicated that talks between Russia and China on Power of Siberia-2 were likely in an advanced stage, since a pipeline just to Mongolia made little commercial sense for Gazprom.
There is more than pure economics behind Russia’s desire to strike a deal.
Gabuev noted that unlike Gazprom’s previous gas pipeline to China, Power of Siberia-2 would draw on the very same gas fields the company uses to supply the European market.
Making Power of Siberia-2 a reality would therefore provide Gazprom with “additional leverage when talking with European customers, particularly at a time of heightened tension between Russia and the West”, he added.
“Once the deal is signed, Russia will have an alternative route to ship its gas,” Gabuev said. “And while China will not replace all deliveries to the European market, it can take care of a significant chunk – at least one third.”
The question of leverage has become especially relevant in Moscow in recent months, amid a renewed standoff over Ukraine.
This month, the new government in Berlin warned that it would block Russia’s long-awaited Nord Stream-2 gas pipeline to Germany from coming into service if there is any new “escalation” by the Kremlin in Ukraine.
Meanwhile, China is shifting to natural gas as part of an ambitious drive to achieve carbon neutrality by 2060.
China’s annual gas consumption is expected to reach 620 billion cubic metres by 2040 and overtake oil as the leading fuel source by 2050, according to data made public in September by Sinopec, one of the country’s largest energy companies.
Lin of Xiamen University explained that gas would be an effective “bridge fuel” between coal and renewables for China.
But like Russia, China also has geopolitical incentives for pursuing Power of Siberia-2.
For the better part of the last two decades, Chinese strategists have warned that the country’s heavy reliance on maritime imports of energy resources made it vulnerable to a potential blockade by the US navy.
Those concerns have only grown as both the Trump and Biden administrations hardened Washington’s stance toward Beijing.
According to Lin, one way China can mitigate that risk is by getting more of its oil and gas from Russian pipelines. “The fact that Russia and China have a common border provides a more secure route for transporting gas than by sea,” Lin said.
Still, some in Moscow warn that Power of Siberia-2 could bring risks along with rewards. Gabuev argued that one potential downside is that it could make Russia overly dependent on China as a gas customer, a problem that is likely to get worse if relations between the Kremlin and the West continue to deteriorate.
“The payback period for such a complex and expensive project is 20-30 years. A lot of things can happen between now and 2050, so tying yourself up to this one customer with this pipeline could be pretty risky,” he said.
“Especially since over time, global energy market shifts are likely to strengthen China’s leverage but not Russia’s.”