Three people with knowledge of the situation say that Russia’s efforts to reach a deal on a major pipeline with China have been stymied by what Moscow views as Beijing’s unreasonable requirements regarding price and supply.
Beijing’s hard stance against the Power of Siberia 2 Pipeline highlights how President Vladimir Putin has become increasingly dependent on Chinese leader Xi Jinping to provide economic support following Russia’s invasion of Ukraine.
People familiar with the situation said that China wanted to pay prices close to the heavily subventioned domestic prices of Russia and only committed to purchasing a fraction of the 50bn cubic meters of gas per year planned capacity of the pipeline.
The approval of the pipeline will transform the fortunes and the state monopoly on gas exports, Gazprom. It will link the Chinese market with the gasfields that were once supplying Europe.
Gazprom lost Rbs629bn (about $6.9bn), its largest loss in at least 25 years, due to a sharp decline in gas sales in Europe. The continent has been more successful than expected in moving away from Russian energy.
Two people have said that the power of Siberia 2 impasse is the reason why Alexei Miller (Gazprom’s CEO) did not accompany Putin during his state visit to Beijing in October.
Miller was on a trip in Iran and would have been crucial for any serious negotiation with China. His absence was “highly symbolic”, according to Tatiana Mitrova a research fellow of Columbia University’s Center on Global Energy Policy.
Map of the Gazprom pipelines in Asia, including the Power of Siberia 2 project that runs from the Yamal peninsula to the Arctic Circle and through Mongolia up to northeast China
According to people familiar with the situation, Putin asked Xi to sign a deal for the pipeline, as well as to increase Chinese bank activity in Russia, and to ignore a peace meeting being organized by Ukraine.
China announced Friday that it would not attend the Ukraine summit in Geneva. Two people claimed that Beijing and Moscow had discussed ringfencing banks to finance the trade of components for Russia’s defense industry. This would almost certainly result in US sanctions, which would remove any such bank from the global financial system.
The people said that an agreement on the pipeline is still far away, and the proposed cooperation with Chinese banks is much smaller than what Russia requested.
The Kremlin didn’t immediately respond to an inquiry for comment. Gazprom refused to comment.
Alexander Gabuev of the Carnegie Russia Eurasia Center, Berlin, said that the failure of Russia to reach a deal shows how the war with Ukraine has made China a major partner in their relationship.
Gabuev stated that “China may need Russian gas as a strategic source of supply, not dependent on maritime routes which would be affected if there was a conflict in the South China Sea or around Taiwan.” “But for that to be worthwhile, China needs a very low price and flexible commitments.”
China’s gas demand is projected to increase to about 250 bcm per year by 2030 from 170 bcm per year in 2023.
The paper stated that the level of 2030 demand could be met largely or completely by existing contracts for pipeline supplies and liquefied gas. By 2040, however, the gap between China’s import demand, and existing commitments, would reach 150 billion cubic meters, according to this paper.
Gazprom Power of Siberia Gas pipeline worker
Gabuev stated that due to the lack of an alternative route overland for Russia’s gas exports, Gazprom will probably be forced to accept China’s conditions.
“China believes that time is on its side.” He said that China has the time to wait and squeeze the best out of Russia. The pipeline can be constructed quickly because the gasfields have already been developed. The Russians have no other way to sell this gas.
Gazprom sold gas at high prices to Europe before the Ukraine war to subventionise Russia’s own market.
Researchers at CGEP calculated that China pays Russia less than its other gas suppliers. The average price is $4.4 per million British Thermal Units, compared to $10 for Myanmar and only $5 for Uzbekistan.
According to the data published by the Russian Central Bank, during the same years Russia exports gas to Europe for about $10 per million Btu.
Gazprom exports to Europe dropped to 22 billions of dollars in 2023, from 230 billions in average per year during the decade prior to the full-scale invasion in Ukraine. They are expected to fall further when a transshipment agreement with Ukraine expires this year.
A failure to increase supplies to China could be a major blow. Unreleased data from a major Russian Bank excluded Power of Siberia 2 in its recent baseline forecast for Gazprom. This reduced the expected profit of the company for 2029, when the bank anticipated the project would launch.
China did not respond immediately to a comment request.
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