While Russian President Vladimir Putin traveled to Beijing this week to meet with Chinese President Xi Jinping, Russia’s energy giant Gazprom sought to establish a cross-border connection of a different kind. In Beijing on September 2, Gazprom CEO Alexei Miller announced that a “legally binding memorandum” had been signed for the Power of Siberia 2 (PoS-2) natural gas pipeline, according to Interfax, a Russian news agency. It would be easy to see this as a major step forward in the relationship between Moscow and Beijing, but there are reasons to caution against this interpretation. For starters, the Chinese side has not yet confirmed this news, suggesting that the pipeline is not, in fact, finalized.
If Russia and China both threw their weight behind completing the PoS-2, then Western capitals would not be wrong to perceive it as evidence of Putin and Xi deepening their countries’ economic, political, and perhaps even military cooperation. But the pipeline is unlikely to advance—at least not with great urgency. Moscow’s enthusiasm for the project is not matched by Beijing.
Still, the Gazprom announcement is significant. While media attention is understandably fixated on the potential 50 billion cubic meters per year (bcm/yr) from PoS-2, Miller also announced capacity expansions on the first Power of Siberia (PoS-1) pipeline and the Far Eastern Route totaling 8 bcm/yr. If true, these incremental volumes from capacity expansions would supplement other Russian natural gas exports to China already occurring directly via pipeline connections and Arctic LNG 2 and indirectly via Central Asia. Altogether, these smaller expansions approach the scale of another PoS-1 pipeline over time, even if not in a single megaproject.
Either strategically or inadvertently, Beijing and Moscow may be adopting a “Moneyball approach” to natural gas cooperation: while they may not be able to build a megaproject, they may be re-creating the volumes in the aggregate via several smaller projects.
Why Russia wants the pipeline
Three-and-a-half years into Russia’s war on Ukraine, the Russian economy is proving more resilient than many expected, but a megaproject pipeline could mitigate looming post-war challenges.
The 50 bcm/yr of new export flows from PoS-2 (58 bcm/yr, if the PoS-1 and Far Eastern Route deals also move forward) would reshape global gas markets, undercut liquefied natural gas (LNG) exporters—especially the United States, the world’s largest exporter—and lock Beijing and Moscow into a thirty-year economic commitment.
Moscow can draw on nonliquid assets and more than $200 billion of central bank reserves to keep the economy afloat, as the Atlantic Council’s Charles Lichfield recently noted. Still, Russia’s long-term economic liabilities may become more pronounced in the post-war period, even if it enters into a cease-fire in the coming months: World oil prices are expected to soften. The Russian labor force has permanently shrunk due to the sustainment of more than one million casualties in the war. And shifting from a war economy will prove wrenching for whole sectors and regions, especially as Chinese firms that expanded into wartime Russia will complicate the transition.
While the PoS-2 and the other gas agreements won’t solve Russia’s fundamental challenges, it could make them more manageable. Significantly, Gazprom may believe that even announcing headway in PoS-2 negotiations may grant it more leverage in postwar negotiations with European buyers.
Why China may be more hesitant
While Russia is eager, perhaps even desperate, to sell gas to China, there appears to be considerable ambivalence in Beijing. While China increasingly requires more energy, and there is still plenty of appetite for coal-to-gas switching in northern China, it’s unclear that the pipeline will move forward for several reasons.
To date, there have not been any authoritative statements from the Chinese government or Chinese media regarding what it calls the “Western natural gas pipeline.” While Russian media has promoted the purported deal, and Western media outlets have reported these findings, authoritative Chinese government organs and state media outlets have been quiet so far, suggesting negotiations are still ongoing.
Additionally, there is no public information about contract terms—and the devil is in the details. While the original Power of Siberia’s terms have never been publicized, the Carnegie Endowment for International Peace’s Sergey Vakulenko’s imputation of prices suggests Russia secured the worst terms out of all Chinese pipeline partners. Furthermore, Russia’s negotiating leverage has deteriorated starkly since PoS-1 was inked in 2014. Global LNG supply is much more competitive vis-à-vis pipeline natural gas. Russia’s full-scale invasion of Ukraine severely damaged its ability to sell to Europe, its other major overland export market. And new technologies—many of them made in China—are increasingly viable alternatives to Russian natural gas.
But the most significant reporting omission may be financing, which was a key sticking point in the negotiations over the first Power of Siberia pipeline: Gazprom initially pushed for a large Chinese prepayment to help fund the Russian section, but Beijing resisted. As a result, Gazprom was left to finance the domestic portion itself, while the state-owned China National Petroleum Corporation backed the Chinese section.
Although the Chinese economy is much larger than in 2014, financing PoS-2 will likely prove much more difficult. To start with, the pipeline is much longer (1,400 km) and larger (50 bcm/yr) than its predecessor, implying higher capital expenditures, financing costs, and longer payback periods, especially as the project is unlikely to open any time before 2030. If the project moves forward, Russia will likely shoulder most of the financing risk, as China has little reason to accept worse terms than before. Finally, the pipeline could become a stranded asset due to uncertainties in Sino-Russian relations or technological advances.
Indeed, if Beijing inks PoS-2, then it will effectively bet against developing two technologies it seeks to dominate: heat pumps and batteries.
PoS-2 would mainly serve northern China, where demand is concentrated in industry and heating, not power generation. Chinese provincial-level gas demand data is sparse, but China’s National Energy Administration reports industry, city gas (heating), and power account for 41 percent, 34 percent, and 18 percent of consumption, respectively, nationwide—and China’s natural gas-fired power plants are overwhelmingly concentrated in the south and east.
China has already installed more than 250 gigawatts of electricity-driven heat pumps, while the central government has issued plans to expand the industry. Coal-to-electricity switching (and even gas-to-electricity switching) will limit the growth prospects of natural gas for heating.
Chinese natural gas demand in industry is also likely to face pressure, as recent analyses show battery electric vehicles making headway even in the heavy-duty vehicle sector. This could limit future demand for LNG-powered trucks, which have become an increasingly important driver of Chinese natural gas demand. Given that China will very likely see additional advances in next-generation battery chemistries, vehicles powered by electricity—not LNG—may increasingly replace diesel-fired heavy-duty vehicles in northern Chinese cities.
Implications for US and European policymakers
The PoS-2 faces significant, perhaps even insurmountable economic, financial, and political challenges. Miller’s announcement this week should largely be read as a signal of Gazprom’s increasing desperation, not that the pipeline will move forward.
Still, the deal is significant—even if only the smaller projects totaling 8 bcm/yr move forward. That volume, the equivalent of 6 million tons per year, or 0.8 billion cubic feet per day, is roughly the size of a small LNG project. Furthermore, China and Russia have established a pattern of inking smaller oil and gas deals that can be cumulatively significant.
Such smaller arrangements include a 10 bcm/yr contract signed in February 2022 for the Russia-to-China Far Eastern Route. But some exports are taking place indirectly and under the radar, including the 2023 agreement between Russia and Uzbekistan to intake 2.8 bcm/yr of imports that could scale up to 10 bcm/yr by 2030. Indeed, Russian net exports to Commonwealth of Independent States countries—which include Belarus and Central Asian states—have more than doubled since the start of Russia’s full-scale war in Ukraine, growing by 13 bcm/yr. Importantly, Russia’s exports to Central Asia may support the region’s shipments to China, although this relationship is not one-for-one. Turning to oil, China signed an agreement for 100 million tons of Russian crude oil over ten years in February 2022; it also bought an additional 2.5 million tons per year this week.
In sum, while it is an open question of how far the Power of Siberia-2 project will go, Russia has already secured significant oil and gas export volumes via smaller projects, largely from Chinese buyers.
So, how should Washington and Brussels view these developments?
A portion of the Trump administration seems to believe that it can effectuate a “reverse Kissinger” and peel Moscow away from Beijing. This development is evidence against that approach succeeding. Even if China and Russia have “only” agreed to a slimmed-down agreement of 8 bcm/yr, it will harm US interests by constricting LNG exports and making Beijing less reliant on US energy.
Similarly, the gas announcement could be an attempt by Russia to signal to Europe that it can sell to other markets. Moscow likely hopes that the prospects of a megadeal with China, however slim, will give it more leverage in any postwar negotiations with European gas buyers.
Washington and Brussels now have an opportunity to advance their shared goals at the expense of Beijing and Moscow. China is Russia’s most important trade partner and provides indispensable defense industrial base support to Moscow. Any further natural gas tie-in risks prolonging the war in Ukraine by sustaining Russia’s economy and bolstering Putin politically. The United States and its European allies should jointly consider targeted secondary sanctions against Russian energy companies, Chinese firms aiding the Russian war effort, or both.
Joseph Webster is a senior fellow at the Atlantic Council’s Global Energy Center and the Indo-Pacific Security Initiative; he also edits the independent China-Russia Report.
Landon Derentz is vice president, energy and infrastructure, senior director and Morningstar Chair for Global Energy Security at the Atlantic Council Global Energy Center. He previously served as director for energy at the White House National Security Council and director for Middle Eastern and African affairs at the US Department of Energy.
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Image: An employee in branded jacket walks past a part of Gazprom's Power Of Siberia gas pipeline at the Atamanskaya compressor station outside the far eastern town of Svobodny, in Amur region, Russia November 29, 2019. Picture taken November 29, 2019. REUTERS/Maxim Shemetov.
