By Alexander Jones, International Banker
On September 2, Russia and China signalled to the world a monumental expansion of their commercial energy ties when they signed an Agreement of Strategic Cooperation outlining the construction of the long-delayed Power of Siberia 2 natural-gas pipeline and the Soyuz-Vostok transit pipeline through Mongolia. Having lost key markets in the West in recent years, Russia’s decision to proceed with a second major pipeline to transport gas from Siberian gas fields to China will undoubtedly give the country a much-needed outlet for its energy-export business. The deal also highlights China’s strong desire for pipeline gas, which, in turn, has profound implications for the structure of future global energy flows.
The original Power of Siberia pipeline has been operational since December 2019, supplying natural gas from the Kovyktinskoye field in the Irkutsk Region and the Chayandinskoye field in Yakutia to domestic consumers in the Russian Far East provinces and to China. The second pipeline, however, is slated to deliver gas from Russia’s Yamal Peninsula to Northeast China via Mongolia, with the agreement’s term set at 30 years, according to Alexey Miller, the chairman of the Gazprom Management Committee.
“Over the years of the joint work, together with our Chinese partners, we have built a strong energy bridge which links our nations and serves to benefit both countries,” Miller confirmed after signing the agreement and other documents alongside China’s state energy firm, China National Petroleum Corporation (CNPC). “Today, a very important step was made to further strengthen and develop our strategic partnership, increase the reliable supplies of clean energy, natural gas, to China, and meet the demand of China’s rapidly growing economy for this type of fuel.”
Discussions over the construction of Power of Siberia 2 date back to 2006, but they achieved limited progress until the war in Ukraine necessitated Moscow’s push for alternative sources of energy demand to offset its loss of access to the European market. China’s hesitancy to commit to the deal, as both parties failed to see eye-to-eye on price, partly explains the pipeline’s failure to advance until now. And while the details of the new agreement have yet to be hammered out, the signing of legally binding documents on September 2 demonstrates Beijing’s readiness to purchase larger volumes of pipeline gas from Russia.
“There was some progress at certain stages, but [China and Russia] didn’t reach a final consensus,” Zhao Long, a specialist in Russian and Central Asian affairs at the Shanghai Institutes for International Studies (SIIS), recently explained to the South China Morning Post (SCMP). “The Siberia 2 gas pipeline could lead Russia to open up the Asian market, as a way to achieve export diversification. On the other hand, the pipeline is a supplement to China’s energy security. It [China] could avoid geopolitical impacts by reducing import reliance on some countries, like Australia.”
Indeed, the sheer scale of the project is sure to have a profound impact on the structural flows of global energy markets. Valued at $13.6 billion, the project is expected to involve a massive 2,600-kilometre pipeline supplying around 50 billion cubic metres [bcm] of natural gas per year to Northern China. What’s more, China also recently agreed to boost import volumes through the existing Power of Siberia pipeline, with Miller acknowledging that Russia will increase supplies via the pipeline to 44 billion cubic metres a year from 38 billion cubic metres. Gas deliveries via a pipeline from Sakhalin Island in the Russian Far East will also be expanded by 20 percent to 12 billion cubic metres annually.
The total amount of gas flowing from Russia to China across all facilities could surpass a staggering 100 billion cubic metres—a figure that is roughly equal to the amount Russia was initially estimated to supply Europe following the completion of the now-defunct Nord Stream 2 pipeline. “The project to build Power of Siberia 2 and the Soyuz-Vostok gas pipeline, the transit link through Mongolia, as well as the gas shipment capacity in China, is going to become the largest, the most massive and capital-intensive gas project in the world,” Miller stated, according to Russian news wires.
Gazprom’s chief executive also confirmed that the prices of the Power of Siberia 2 gas that Chinese consumers will access will be cheaper than those of European consumers. “The point is that gas deliveries to China are made from the fields in East Siberia, and supplies to Europe are made from fields in West Siberia. Fields in West Siberia are located much farther than fields in East Siberia to the border of Russia and China, or Russia and Mongolia,” Miller told reporters. “Accordingly, transportation costs of gas supply to the Chinese market are significantly lower. Therefore, the Chinese market is objectively located closer, logistical costs are lower, and the price is objectively smaller accordingly.”
Should flows successfully commence via Power of Siberia 2, moreover, China’s status as the world’s leading importer of natural gas through both pipelines and seaborne liquefied natural gas (LNG) will only be further cemented. “Since 2021, it [China] has topped global LNG imports. In 2024 alone, it imported 107 bcm of LNG and 71 bcm via pipelines,” economics writer Suleyman Karan recently explained in West Asia-focused news publication The Cradle. “International Energy Agency (IEA) data show that China’s LNG imports have been falling (year-on-year) amidst weak demand and rising competition with Europe for LNG cargoes. At the same time, China is expanding its pipeline gas import capacity, a shift that analysts say could gradually reduce China’s dependence on LNG.”
The launch of Power of Siberia 2 would represent a “structural shock”, according to Sebastian Contin Trillo-Figueroa, a geopolitical analyst based in Hong Kong, who noted that the pipeline’s transportation of 50 billion cubic metres per year to China would “lock in Russian gas at scale” and reduce the use of LNG cargo shipments that are costlier and more exposed to risks. An overland supply “is not only cheaper but also more secure”, Trillo-Figueroa told the South China Morning Post, helping China to “bypass chokepoints” and “insulate” itself from global price swings.
Christopher Granville, managing director at macro-research firm TS Lombard, meanwhile, observed that while the significance of the Power of Siberia 2 gas pipeline agreement remains “somewhat limited” at present, it should not be dismissed as a “nothing burger”. “For the past decade, Gazprom has been pushing China to give the go-ahead for Power of Siberia-2, only to be met—until now—with positive but non-committal noises. So today’s signing of an MOU is a step forward for Gazprom,” Granville explained to CNBC on September 2. “The fact that this has happened against the background of the fraught Ukraine war endgame is a clear enough signal of China’s steady strategic backing for Russia as the lynchpin of the new multipolar order to which both these core Eurasian powers aspire.”
From a Western perspective, the Power of Siberia 2 deal could prove damaging to the United States, as it strongly implies that China will reduce its requirements for LNG—including from the world’s biggest LNG supplier, the US. With trade relations already frayed since Washington’s implementation of import tariffs, as well as China’s decision to stop receiving US LNG cargoes in early February, the launch of the Power of Siberia 2 pipeline will only further weigh on the US’ capacity to expand its market presence.
“If the PoS-2 proceeds, the prospect for a larger US share in this market would be in doubt,” according to Jane Nakano and Leslie Palti-Guzman of the Center for Strategic and International Studies (CSIS). “Moreover, if the additional Russian gas supply translates into the shrinking Chinese appetite for US LNG—whether for a commercial or geopolitical reason—prospective LNG export projects in the United States could struggle to reach a final investment decision, while existing projects could become underutilized.”
Nakano, CSIS senior fellow for energy security and climate change, and Palti-Guzman, CSIS senior associate for energy security and climate change, also projected that the new pipeline would deepen Russia’s economic dependence on China. “Following the 2022 invasion, Europe has committed to weaning its dependence on Russian gas by 2027,” they added in a September 5 piece. “Losing the market, which accounted for about 80 percent of its pipeline gas exports and over 40 percent of its LNG exports in 2021, renders it an urgent agenda for Russia to secure an alternative outlet. Before the war, the sale of 150 bcm of gas to Europe was earning Russia $20–30 billion on average.”