The main intrigue of the negotiations between Vladimir Putin and Xi Jinping centers on whether the long-awaited project of the "Power of Siberia – 2" gas pipeline will be signed. The parties have been discussing this for over ten years. The route and construction of the pipeline have already been approved, but there remain some nuances. What are these nuances, and why should China really hurry to finalize the contract for its own security?
The technical aspect has been established: it is known where the "Power of Siberia – 2" pipeline will run and how it will be constructed. The last remaining step is to sign the commercial contract. However, complications have arisen at this stage. Nevertheless, experts are confident that it will be signed, if not at the current meeting of the two presidents of Russia and China, then at one of the economic forums, such as in St. Petersburg.
The confidence of experts stems from China's realization of the real threat of resource shortages, which was previously only hypothetical. The main advantage of Russian gas is the reliability of its supply, thanks to the pipeline system.
Moscow and Beijing have generally reached an understanding on the key 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 finalize some nuances, 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 information agency "Vesti," saying that final agreements on specific contracts are nearing completion. "As for political decisions, agreements at the leaders' level were reached earlier, and now technical work is underway to finalize the contracts," he stated.
"I believe the intrigue remains. Everything regarding the pipeline's construction and route was secured during Vladimir Putin's previous visit to China in the form of a legally binding memorandum. Only the commercial contract remains to be signed. The issue here lies solely in the parties' inability to agree on the price of gas. And it is still unclear whether there has been any movement on this matter," says Igor Yushkov, an expert at the National Energy Security Fund and the Financial University under the Government of the Russian Federation.
However, the chances for signing have significantly increased for one simple reason: the situation in the Hormuz Strait is prompting China to act. "China has clearly shown that the United States is using energy to exert pressure on it. Initially, Venezuela began implementing reforms favorable to 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, due to the Americans starting conflicts, China has also lost Iranian oil at preferential prices. Essentially, the U.S. is depriving China of its most advantageous energy suppliers," reflects the expert from the National Energy Security Fund.
Similar pressure is occurring on China's LNG supplies as well. Initially, there were sanctions against Russian LNG projects, and now China has lost access to Qatari LNG due to the blockade of the Hormuz Strait and damage to infrastructure in Qatar.
"Last year's trade conflict with the U.S. also played a role; it is still unresolved and has led to China effectively abandoning American LNG purchases," says Sergey Tereshkin, General Director of Open Oil Market.
There are risks associated with Australia as well, which is among the top three largest LNG producers globally. "Previously, China temporarily stopped purchasing Australian coal due to disagreements surrounding the COVID-19 pandemic, later replacing Australian supplies with imports from Mongolia. The risks of similar diplomatic disagreements remain, so it is crucial for China to hedge against potential LNG shortfalls in the coming years," states Tereshkin.
"China understands that the U.S. will continue to obstruct energy supplies, hindering its development. Therefore, purchasing hydrocarbons from Russia is one of the few options that can save it. The main advantage of 'Power of Siberia – 2' is the reliability of supply. This factor is now acquiring special significance for China,"
– says Yushkov.
Overall, geopolitical factors are leading to the conclusion that the "Power of Siberia – 2" project will eventually be realized, concurs Tereshkin.
"The more China develops, the greater its confrontation with the U.S. Therefore, it makes sense for China to hurry with the commercial contract for the Russian gas pipeline, as it will take another five years to build, followed by several more years to reach the design capacity of 50 billion cubic meters. This means that achieving 50 billion cubic meters per year would be a prospect for the mid-2030s. Everyone understands that U.S. pressure on China will increase significantly by that time," states Yushkov.
The price of gas in the contract, which is likely to be signed for ten years, is extremely important for both parties. The project's profitability depends on this. It is clear that Russia wants more, while China, as the buyer, wants to pay less. Yushkov recalls that when discussing another route for the pipeline—not through Mongolia—Beijing sought gas prices similar to those of Turkmen gas, which has been flowing through the "Central Asia – China" pipeline for sixteen 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 route of the pipeline to avoid competition with Turkmen gas.
"Turkmen gas prices are low because China initially invested in production projects and the construction of these pipelines. Now China is recouping its investments in field development and pipeline construction," explains the expert. However, in the case of "Power of Siberia – 2," the resource base is already established (unlike "Power of Siberia – 1"), but this merely indicates prior investments.
The second nuance that is likely being discussed by the parties is how to index the gas price. "What will the price indexation be based on—oil, as in 'Power of Siberia – 1,' which is tied to the prices of oil and petroleum products in Asian ports? Or will it be linked to gas prices on the exchange? However, the experience of the first 'Power of Siberia' shows that oil indexation is more convenient for China. First, it is more stable; second, it is more beneficial. If there were indexation to exchange gas prices, it 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 preparing to completely abandon Russian gas by 2027, so relying on that buyer is not feasible. Therefore, expanding cooperation with another buyer is an important goal.
Of course, "Power of Siberia – 2" cannot fully compensate for the losses in the European market.
"In 2021, we supplied around 150 billion cubic meters of pipeline gas to the European market. That's three times the volume of 'Power of Siberia – 2.' Of course, these export directions are not mutually exclusive."
– says Yushkov.
"In terms of volume, Russia has 100-150 billion cubic meters of gas freed up from European routes, plus Gazprom can produce another 100 billion cubic meters from the West Siberian fields. So in total, there is around 200-250 billion cubic meters of free gas. Therefore, we can comfortably construct two 'Power of Siberia – 2' projects and restore all previous supply volumes to Europe. This is not an issue," concludes Yushkov.
Source: Vzglyad
