The Main Intrigue of Vladimir Putin's Negotiations with Xi Jinping: Will the Long-Awaited Power of Siberia-2 Gas Pipeline Project Be Signed? The Parties Have Been Discussing It for Over Ten Years. The Route and Construction of the Pipe Have Already Been Approved, But Some Nuances Remain. What Are These Nuances, and Why Should China Really 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 gas pipeline will run and how to construct it. The last step remains – signing the commercial contract. However, this point is fraught with complications. Nevertheless, experts are confident that it will be signed, whether at the current meeting between the two presidents of Russia and China or at one of the economic forums, such as the one in St. Petersburg.
Experts' confidence stems from the fact that China has felt a real threat of energy resource shortages, which was previously only hypothetical. The main advantage of Russian gas is the reliability of its supply, ensured by 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, press secretary of the President of Russia. The countries only need to negotiate a few nuanced details, he added. According to him, the agreements reached represent a significant achievement in bilateral relations.
Deputy Prime Minister Alexander Novak expressed even more optimism in an interview with the news agency Vesti: final agreements on specific contracts are nearing completion. "Regarding political decisions, agreements at the leaders' level had been reached earlier, and now technical work is underway to finalize the contracts themselves," he stated.
"I believe the intrigue remains. Everything concerning the construction of the pipeline and its route was enshrined 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 solely that the parties cannot agree on the gas price. And it is still unclear whether there has been any movement towards each other on this matter," says Igor Yushkov, an expert from the National Energy Security Fund (NESF) and the Financial University under the Government of the Russian Federation.
However, the chances of signing have significantly increased for one simple reason. The entire situation around the Strait of Hormuz is pushing China towards this. "China has openly shown that the United States is using energy to exert pressure on it. First, Venezuela began implementing reforms favorable to the United States, which in response slowly 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 the conflict. In other words, the US is depriving China of its most advantageous energy suppliers," ponders the NESF expert.
A similar pressure is also present concerning LNG supplies to China. Initially, sanctions against Russian LNG projects were imposed. 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 US, which remains unresolved and has led to China's effective refusal to purchase American LNG, has also played a role," says Sergey Tereshkin, General Director of Open Oil Market.
Risks exist with Australia, which is among the top three largest LNG producers in the world. "Previously, China temporarily halted purchases of Australian coal due to disagreements over the reasons for the COVID-19 pandemic, later replacing Australian raw materials with supplies from Mongolia. The risks of such diplomatic disagreements remain, so it is essential for China to hedge against potential LNG shortfalls in the coming years," Tereshkin adds.
"China understands that the US will continue to cut off 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 supply, and this factor has now gained special significance for China,"
– says Yushkov.
Overall, geopolitical factors are leading to the conclusion that the Power of Siberia-2 project will indeed be realized, Tereshkin agrees.
"The more China develops, the more confrontations it will have with the US. Therefore, it makes sense for China to hurry with the commercial contract for the Russian gas pipeline, as it will take about five more years to construct, followed by several more years to reach its design capacity of 50 billion cubic meters. Thus, reaching 50 billion cubic meters per year is a prospect for the mid-2030s. Everyone understands that US pressure on China will significantly increase by that time," comments Yushkov.
The price of gas in the contract, which will likely be signed for 10 years, is crucial for both parties, as it will determine the profitability of the project. It is clear that Russia wants a higher price, while China, as the buyer, seeks to pay less. Yushkov reminds that when discussing another gas pipeline route – not through Mongolia – Beijing desired the same low gas prices 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 enter the same part 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 the construction of these pipelines, allowing it to recoup its investments in field development and pipeline laying. In contrast, Russia is both building the pipeline and developing the fields. However, in the case of Power of Siberia-2, the resource base already exists (unlike Power of Siberia-1), which only means that investments were made in it earlier," the expert explains.
The second nuance that is likely being discussed by the parties is to what the gas price will be linked. "What kind of price indexation will there be – oil-linked as in Power of Siberia-1, which ties prices to the cost of oil and petroleum products in Asian ports? Or will it be linked to the gas price at the stock exchange? However, the experience of the first Power of Siberia shows that oil-linked indexing is more convenient for China. Firstly, it is more stable; secondly, it is more beneficial. If there was indexation to exchange gas prices, the situation would be worse for China," explains Igor Yushkov.
For Russia, this agreement is equally important as it represents additional income from the export of 50 billion cubic meters of gas. Europe is set to fully abandon Russian gas by 2027, meaning it cannot rely on this buyer. Therefore, expanding cooperation with another buyer is a key goal.
However, "Power of Siberia-2" will not be able to fully compensate for the losses on the European market.
"In 2021, we supplied around 150 billion cubic meters of pipeline gas to the European market. That's equivalent to three Power of Siberia-2 projects by volume. These are certainly not mutually exclusive export directions,"
– says Yushkov.
"In terms of volumes, Russia can free up 100-150 billion cubic meters of gas from the European direction, plus Gazprom can produce another 100 billion cubic meters in the West Siberian fields. Thus, in total, there will be about 200-250 billion cubic meters of free gas. Therefore, we can easily build two Power of Siberia-2 projects and restore all previous supply levels to Europe. This is not a problem," concludes Yushkov.
Source: Vzglyad
