The main intrigue of Vladimir Putin's negotiations with Xi Jinping centers around whether the long-awaited "Power of Siberia 2" gas pipeline project will be signed. The parties have been discussing it for over a decade. The route and construction of the pipeline have already been approved. However, some nuances remain. What are these nuances, and why should China indeed hurry with the contract for its own security?
The technical side of the issue is settled: it is known where the "Power of Siberia 2" pipeline will run and how it will be constructed. What remains is the final step – to sign the commercial contract. This is where complications arise. However, experts are confident that it will be signed, if not during the current meeting between the two presidents of Russia and China, then at one of the economic forums, for example, in St. Petersburg.
The expert confidence stems from China's realization of the real threat of energy resource shortages that was previously only hypothetical. The main advantage of Russian gas is the reliability of its supply due to the pipeline system.
Moscow and Beijing have generally reached an understanding on the main parameters of the "Power of Siberia 2" gas pipeline project, stated Dmitry Peskov, the press secretary of the Russian president. The two countries only need to iron out a few nuances, he added. According to him, the agreements reached are a significant achievement in bilateral relations.
Deputy Prime Minister Alexander Novak expressed even more optimism in an interview with the news agency "Vesti": the final agreements on specific contracts are nearing completion. "As for the political decisions, agreements at the leaders' level were reached earlier, and now technical work is underway to finalize the contracts," he said.
"I believe the intrigue remains. Everything concerning the construction of the pipeline, the route, was established during Vladimir Putin's last visit to China in the form of a legally binding memorandum. Only the commercial contract remains to be signed. The issue here is purely that the sides cannot agree on the gas price. And it is still unclear whether there has been any movement towards each other on this issue," says Igor Yushkov, an expert at the National Energy Security Fund (NESF) and the Financial University under the Government of the Russian Federation.
However, the chances for signing have significantly increased for one simple reason: the entire situation in the Strait of Hormuz is pushing China in this direction. "China has openly shown that the United States uses energy to pressure it. First, Venezuela began implementing reforms that benefit the United States, which in response gradually lifted sanctions on the country. As a result, China lost access to Venezuelan oil at favorable prices. Now China has also lost Iranian oil at discounted prices due to the Americans, who initiated conflict. In other words, the U.S. is depriving China of the most advantageous energy resource suppliers," the NESF expert reflects.
Similar pressure is occurring on LNG supplies to China. Initially, there were sanctions against Russian LNG projects. Now China has lost access to Qatari LNG due to the blockade of the Strait of Hormuz and damage to infrastructure in Qatar.
"Last year’s trade conflict with the U.S., which remains unresolved, played a role in this as well, leading to China's practical abandonment of purchases of American LNG," says Sergey Tereshkin, CEO of Open Oil Market.
There are also risks with Australia, which is among the top three largest LNG producers in the world. "Previously, China temporarily refused to buy Australian coal due to disagreements over the causes of the COVID-19 pandemic, subsequently replacing Australian raw materials with supplies from Mongolia. The risks of similar diplomatic disputes remain, so it is important for China to hedge against potential LNG shortages in the coming years," Tereshkin remarks.
"China understands that the U.S. will continue to restrict energy supplies, hindering its development. Therefore, purchasing hydrocarbons from Russia is one of the few options that could save it. The main advantage of 'Power of Siberia 2' is the reliability of supplies. This factor now takes on special significance for China."
– says Yushkov.
Overall, geopolitical factors indicate that the "Power of Siberia 2" project will indeed come to fruition, agrees Tereshkin.
"The more China develops, the more confrontation it will have with the U.S. Therefore, it makes sense for China to expedite the commercial contract for the Russian gas pipeline, because it will take another five years to build, and then several more years to reach the designed capacity of 50 billion cubic meters. In other words, achieving a capacity of 50 billion cubic meters per year is a prospect for the mid-2030s. Everyone understands that U.S. pressure on China by that time will significantly increase," says Yushkov.
The issue of the gas price in the contract, which will likely be signed for ten years, is extremely important for both parties, as it directly impacts the profitability of the project. It is clear that Russia wants more, while China, as the buyer, wants to pay less. Yushkov reminds us that when discussing another pipeline route that did not go through Mongolia, Beijing wanted the same low prices for gas as for Turkmen gas, which has been flowing through the "Central Asia – China" pipeline for 16 years. This is because both Turkmen and Russian pipeline gas would arrive in one region of China, competing with each other. Russia had to change the pipeline route to avoid competing with Turkmen gas.
"Turkmen gas prices are low because China initially invested in extraction projects and in building these pipelines. It is now recouping its investments in field development and pipeline construction," explains the expert. Russia, on the other hand, is responsible for both building the pipeline and developing the fields. However, in the case of "Power of Siberia 2," the resource base is already in place (unlike "Power of Siberia 1"), but that only means previous investments have been made.
The second nuance likely under discussion by the parties is what the gas price will be pegged to. "What type of price indexing will be used – oil-based, as in 'Power of Siberia 1'? That one is linked to the price of oil and petroleum products in Asian ports. Or will it be linked to the gas prices on the exchange? But the experience with the first 'Power of Siberia' shows that oil-based indexing is more convenient for China. First, it is more stable; second, it is more advantageous. If there were an indexation linked to exchange gas prices, the situation would be worse for China," explains Igor Yushkov.
For Russia, this agreement is equally important as it provides additional revenue from the export of 50 billion cubic meters of gas. Europe is preparing to fully abandon Russian gas by 2027, which means that hoping for this buyer is unrealistic. Therefore, expanding cooperation with another buyer is a crucial goal.
However, "Power of Siberia 2" will not completely compensate for the losses in the European market.
"In 2021, we exported about 150 billion cubic meters of pipeline gas to the European market. This is three 'Power of Siberia 2' in volume. Of course, these are not mutually exclusive export directions."
– says Yushkov.
"In terms of volume, Russia has 100 - 150 billion cubic meters of gas released from the European direction, plus Gazprom can extract another 100 billion cubic meters from the West Siberian fields. In total, that means approximately 200 - 250 billion cubic meters of available gas. Therefore, we can comfortably build two 'Power of Siberia 2' and also restore all previous supply quantities to Europe. That's not a problem," concludes Yushkov.
Source: Vzglyad
