Why is China hesitant over new gas pipeline from Russia?

By Rhod Mackenzie

Since the beginning of the year, Russian gas supplies to China have been breaking new historical records. Experts predict that the Power of Siberia project will surpass its planned export growth targets for the year due to the attractive price conditions it offers China. Despite this success, Gazprom is already considering the construction of a new gas pipeline, Power of Siberia 2, to further increase its supply to China.
In fact, Gazprom updated its supply record to China four times in just one month. Historical records were set for daily deliveries through the Power of Siberia pipeline on January 2, 3, 12 and 31, 2024. Supplies along this route increased from 15.4 to 22.7 billion cubic meters last year, and Gazprom also repeatedly set records for supply volumes. According to the plan, exports should grow to 30 billion cubic meters this year, but experts do not rule out the possibility of exceeding this target.

Alexey Gromov, director of energy at the Institute of Energy and Finance, suggests that they will attempt to exceed their schedule this year and set another record by producing 32-33 billion cubic meters by the end of the year. The Power of Siberia is expected to reach its design capacity of 38 billion cubic meters per year in 2025.

Given the loss of the European sales market, it would be advantageous for Gazprom and the Russian budget to increase supplies to a maximum of 38 billion cubic meters this year. However, meeting this target in 2024 is unlikely.

The reason for this is twofold: firstly, there is a specific technological process for increasing gas supply from fields, and secondly, there is a plan for preparing the fields themselves that is linked to the Power of Siberia gas pipeline. According to Alexey Gromov, 'Power of Siberia' is based on new fields, Chayandinskoye and Kovyktinskoye, and their capacities are being gradually introduced to load the gas pipeline. This is in contrast to 'Power of Siberia - 2'.

It is unclear why Gazprom is setting records for gas supplies to China.

On one hand, there is an opportunity to increase the amount of pipeline gas taken from Russia due to increased production and the increased throughput capacity of the Power of Siberia. On the other hand, China's gas consumption has increased compared to last year. In January 2023, China had just begun to lift coronavirus restrictions, and it spent the entire year accelerating its economy, resulting in increased consumption. Additionally, demand typically increases during the heating season. Finally, in January, the price of Russian gas became even more attractive to China. This is because the price of gas is tied to the cost of oil and petroleum products on the Asian market with a nine-month lag under the contract with China. As there was a decrease in gas prices nine months ago, this is now reflected in the cost of gas. According to Igor Yushkov, an expert at the Financial University under the Government of the Russian Federation and the National Energy Security Fund.

China receives our gas through the Power of Siberia gas pipeline on very favourable terms. It is currently the cheapest source of pipeline gas to China. According to our estimates,

at the end of last year, gas through the Power of Siberia was sold at an average price of less than $300 per thousand cubic meters. This was cheaper than supplies to China of the same Central Asian pipeline gas, which was priced at $350-370 per thousand cubic meters.

According to Alexey Gromov from the Institute of Energy and Finance, China has requested that Gazprom maximise the pumping of gas through the Power of Siberia gas pipeline, as much as technically possible.

Despite this, it is unclear why Gazprom and China have not signed a contract for gas supplies via the new Power of Siberia-2 gas pipeline. While negotiations are underway, the Chinese have remained silent on this project. Negotiations on the pipeline project passing through Mongolia have been officially announced as delayed. Construction of the gas pipeline was initially planned to commence in 2024, but a commercial contract is required before any construction can begin.

Gromov is doubtful that such an agreement will be signed in the first half of this year. The head of Gazprom, Alexey Miller, confirmed his intention to increase gas supplies to China at the end of the year. The supplies will be along the already agreed routes, which are through the Power of Siberia and the Far Eastern project. However, he did not mention the project 'The Power of Siberia - 2'.

The parties are unable to agree on the price. According to Igor Yushkov, China believes that delaying the deal will put Gazprom in a weaker position, making it more willing to negotiate on price.
l Asian gas at the border, it also participates in projects for its production in these countries, for example, in Turkmenistan. Moreover, the pipeline system was built with Chinese loan money,

Therefore, China still receives loan payments from Central Asian countries, and partly not in money, but in gas. The Russian project deals only with the purchase and sale of gas,” says Alexey Gromov.

Another point is that the Power of Siberia - 2 project requires China to invest in infrastructure on its territory, as well as the understanding that it will have a long-term demand for this gas, which will begin to flow into its territory no earlier than 2030.

However, political events may speed up the signing of the contract between Gazprom and China on a new gas pipeline. Problems with shipping in the Red Sea due to the escalation of the conflict in the Middle East or the intensification of trade confrontation between China and the United States could lead to interruptions in LNG supplies to the Middle Kingdom. Whereas pipeline gas from Russia is not subject to such risks. The combination of a stable attractive price for Russian gas with its stability and security cannot leave practical China indifferent.