Robert M. Cutler

The Power of Siberia–2 natural gas pipeline involves China, Russia, and Mongolia. Russian President Vladimir Putin once dreamt that he could install a valve on it in western Siberia, and direct the gas toward Europe or toward China according to his geopolitical whims. This turned into a pipeline even before Europe began greatly diminishing its reliance on Russian gas due to sanctions over Russia’s war against Ukraine.

A few days ago China made it absolutely clear to Russia that Moscow would have to cover the construction costs of the Power of Siberia–2 pipeline project, without advance payment. China is playing Russia off against Turkmenistan. Let’s look at the background.

Why is Power of Siberia–2 important?

The Power of Siberia–2 project is increasingly urgent for Russia for that reason, but it is unlikely to start deliveries before the early 2030s at the earliest. To understand why, we have to look at its predecessor, the Power of Siberia–1 pipeline and see how they both fit into Russia’s energy export strategy over time.

The pipeline is expected to deliver 50 billion cubic meters per year (bcm/y) of natural gas from Russia’s Yamal Peninsula in western Siberia to China via Mongolia. The collaboration on Power of Siberia–2 is seen as a symbol of the deepening relationship between China and Russia, especially in the face of Western sanctions and confrontations.

Where does the Power of Siberia–1 pipeline come in?

One set of projections from the International Energy Agency even suggest that China may not need another large-scale link with Russia, once the Power of Siberia–1 line reaches full capacity. China also suspects that Russia is insisting on running the pipeline through Mongolia, as opposed to Kazakhstan for example, in order to increase its own influence there. Mongolia has always been a weather-vane for Russian–Chinese great-power competition in Inner Asia.

The Power of Siberia–2 pipeline follows on the Power of Siberia–1 pipeline but is separate from it, with a wholly different route and financial and management structure. The Power of Siberia–1 project’s history dates back to the final years of the twentieth century. In November 1997, Russian President Boris Yeltsin and the head of the Chinese Communist Party Jiang Zemin signed a memorandum on the construction of a 3,000-kilometer gas pipeline from the Kovykta to Shanghai.

It took five years for the Russian government to designate Gazprom as the coordinator of negotiations on Russian gas exports to East Asia. Gazprom came up with various options for organizing the export of Russian gas to China, but none of them was viable.

But China has always had a hard-ball skepticism over the project, since it can always increase its gas imports from Turkmenistan in Central Asia. In the broader context, China is actively seeking to diversify its energy imports. It is negotiating with Central Asian countries for a new gas pipeline, as discussed below, and increasing domestic exploration to boost gas reserves and production.

Is Power of Siberia–1 a precedent for Power of Siberia–2?

The Power of Siberia–1 pipeline had been the subject of price haggling between Russia and China for six years before they signed a 30-year gas deal worth $400 billion in May 2014. This exceptionally included some funding up front from China, which almost never provides such assistance. It was, however, essential for the project’s feasibility. Construction of Power of Siberia–1 began in September 2014, and deliveries to China began in December 2019.

By 2022, the export quantity had reached 15 billion cubic meters per year (bcm). Volumes for 2023 are projected to reach 22 bcm, as additional sections undergo construction that look to bring the pipeline’s eventual final capacity to 38 bcm/y. The 2014 purchase agreement includes Gazprom’s commitment to supply and the CNPC’s commitment to buy 38 bcm/y of gas over a period of 30 years.

In April 2018, the cost of Power of Siberia–1 pipeline—together with the development of the Chayanda field and the Amur Gas Processing Plant—was estimated at 2.5 trillion rubles, equivalent to about $40 billion at the 2018 exchange rate. It receives its gas supply from the Chayanda field in Yakutia (eastern Siberia), which became operational in 2019. Additionally, the Kovykta field in Irkutsk Oblast (southern Siberia, near the border with Mongolia) began supplying gas to the pipeline in early 2023.

More details of the Power of Siberia–1 pipeline

The pipeline’s first phase initiates at the Chayanda field, traverses several locations (including Lensk, Olyokminsk, Aldan, Neryungri, Skovorodino, and Svobodny) while partly sharing a corridor with the Eastern Siberia–Pacific Ocean oil pipeline. The pipeline then connects to the Amur Gas Processing Plant and then forks south towards Blagoveshchensk at the Russia–China border, where it links with up with the Heihe–Shanghai pipeline in China through two tunnels beneath the Amur River.

Together, these segments constitute the eastern route for Siberian gas deliveries to China. The pipeline’s second phase joins the Kovykta field with the Chayanda field. The original design includes an extension from Svobodny through Birobidzhan to Khabarovsk, where it will connect with the Sakhalin–Khabarovsk–Vladivostok pipeline. However, Gazprom has not disclosed whether and when this extension will be constructed.

Currently, the Power of Siberia–1 pipeline supplies Russian gas to China, making Russia the country’s second-largest pipeline gas supplier after Turkmenistan. This pipeline includes a 3,000-kilometer segment in Russia’s Far East and a 5,111-kilometer section in China, expected to be fully operational before 2025. However, Power of Siberia–2 is anticipated to be longer and more technically complex, requiring further feasibility studies, particularly in light of Western sanctions on Russia.

China has recently re-initiated talks with Turkmenistan concerning the long-delayed “Line D” pipeline, which would be the fourth export pipeline to China from the rich reserves in the southeast of the country. Lines A, B, and C entered into service respectively in 2009, 2010, and 2014. With a total export capacity of 55 bcm/y, together they supplied 34 bcm to China in 2021 and 42 bcm in 2022. Line D is projected to carry 30 bcm/y. Turkmenistan’s proven natural gas reserves amount to 2,800 bcm.

Completion of Line D would thus increase total export capacity to China from 55 bcm/y to 85 bcm/y. In 2014, the cost of constructing Line D was estimated at $6.7 billion, although the price of steel on the world market has nominally doubled since then. Turkmenistan has announced the goal of increasing exports to 65 bcm/y after initial completion of Line D. Nevertheless, there is still hard bargaining ahead with China, since the transportation costs make Turkmen gas nominally more expensive to China than Russian gas.

How Power of Siberia–2 lets China play Russia against Turkmenistan

It is understandable that China would give precedence to the pipeline from Turkmenistan, in view of its greater strategic importance. Specifically, this pipeline supports Beijing’s objectives of enhancing trade relations with Central Asian countries and promoting stability in the Xinjiang-Uyghur Autonomous Region. Conversely, Russia, constrained by Western sanctions, finds itself with limited options for its Siberian gas exports, leaving China as its primary market.

However, sourcing gas from Turkmenistan has proven more expensive for China than obtaining it from Russia, as Turkmenistan consistently aims for payment in line with global pricing standards. Simultaneously, China’s recent agreements to import liquefied natural gas (LNG) from Qatar and the United States add complexity to these negotiations, but ultimately, this complexity works in Beijing’s favor.

Conclusion: Investment Takeaway

The unfolding story of the Power of Siberia pipelines is more than just a geopolitical narrative. Interactions among major players like Russia, China, and Turkmenistan are not just about power plays on a global chessboard. They also directly concern the ebb and flow of opportunities and risks in the natural gas market.

In the complex world of energy investments, keeping an eye on these developments is key to making smart, diversified investments. The dynamics of global gas supply are shaped by intricate political and infrastructural factors that can sway market trends, affecting not just particular energy stocks but also broader market movements. The increasing clout of Asian energy markets influences global energy prices and supply chains.

For investors, this means vigilance is crucial. Changes in energy corridors and international deals have far-reaching implications that often extend beyond the immediate sector. Savvy investors need to consider this evolving landscape as a crucial piece of their strategy, particularly now, when energy security is as much about political foresight as it is about environmental sustainability.

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