Power of Siberia 2 Pipeline Talks Halt Over Chinese Price Demands

Russia’s efforts to finalise the significant Power of Siberia 2 gas pipeline deal with China have hit a stumbling block due to Beijing’s stringent demands on price and supply levels, according to sources familiar with the negotiations.

The proposed Power of Siberia 2 pipeline is intended to connect Russian gas fields to the Chinese market, but discussions have stalled over China’s insistence on heavily subsidised prices and limited purchase commitments.

This impasse highlights the increased dependency of Russian President Vladimir Putin on Chinese leader Xi Jinping for economic support following Russia’s invasion of Ukraine.

The potential deal, critical for Gazprom, Russia’s state gas export monopoly, would link gas fields in western Russia that once supplied Europe to the Chinese market. Gazprom, facing a significant financial downturn with a loss of Rbs629bn ($6.9bn) last year, is in dire need of new revenue streams.

Sources indicate that China has demanded prices close to Russia’s domestic levels, heavily subsidised, and is willing to commit to only a small fraction of the pipeline’s planned annual capacity of 50 billion cubic metres. This is a significant ask considering the scale of the infrastructure and the investment involved.

Russian officials remain optimistic publicly, with Dmitry Peskov, Putin’s spokesman, stating that negotiations are ongoing and both sides are committed to reaching an agreement.

However, the absence of Alexei Miller, Gazprom’s chief executive, from Putin’s state visit to Beijing last month has been viewed as a symbolic sign of the difficulties in the negotiations. Miller’s presence in Iran instead of China suggests that substantial progress was unlikely during the state visit.

The pipeline deal was one of three main requests from Putin to Xi, alongside increased activity from Chinese banks in Russia and a snub of a peace conference organised by Ukraine. While China has agreed to skip the Ukrainian summit, cooperation with Chinese banks remains limited, and the pipeline agreement seems distant.

Economic analyst Alexander Gabuev from the Carnegie Russia Eurasia Center in Berlin notes that the war in Ukraine has shifted the power dynamic in favour of China in its relationship with Russia. China could strategically benefit from Russian gas as a secure supply not reliant on maritime routes, which could be compromised in conflicts involving Taiwan or the South China Sea. However, China demands very favourable terms to justify this strategic advantage.

China’s gas import demand is projected to rise to about 250 bcm by 2030, from less than 170 bcm in 2023. While existing contracts could largely meet this demand by 2030, a gap of 150 bcm is expected by 2040, creating potential for future negotiations on the pipeline.

Currently, Russia lacks alternative overland routes for its gas exports, making it likely that Gazprom will have to accept China’s conditions eventually. Gabuev suggests that China is leveraging its position, waiting for the best terms while international focus on the China-Russia relationship shifts elsewhere.

Before the Ukraine conflict, Gazprom relied heavily on European markets, where gas prices were significantly higher. However, exports to Europe have plummeted from an average of 230 bcm annually to just 22 bcm in 2023. The expiry of a trans-shipment agreement with Ukraine at the end of this year will likely reduce these exports further, making the Chinese market even more crucial for Gazprom.

If the Power of Siberia 2 pipeline deal does not materialise, it will be a significant setback for Gazprom. A report by a major Russian bank, seen by the Financial Times, excluded the pipeline from its profit forecasts for 2029, reducing Gazprom’s expected profit by almost 15 per cent.

Despite the current stalemate, the political will from both Moscow and Beijing suggests that negotiations will continue. The ultimate success of these talks will depend on finding a compromise that meets both countries’ strategic and economic needs.

As the global energy landscape shifts, the outcome of this deal will have significant implications not only for Russia and China but also for broader geopolitical and energy market dynamics.

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