Russian gas pivots east
The newly completed Power of Siberia pipeline may boost Moscow's options, but it is hardly a geopolitical big win
Five years after Russian gas giant Gazprom and Chinese state-owned CNPC signed a $400bn deal on the Power of Siberia gas pipeline (PoS), stretching from the Chayandinskoye and Kovytkinskoye gas fields near the Baikal Lake to the Chinese border, the first phase of the project is finally on the brink of production.
While Moscow has tried to frame the project as a successful pivot to the east amid strained tensions with the West, PoS will inevitably increase Russia’s economic dependency on China. The pipeline will supply China’s north-eastern provinces with 4.6bn m³ in the first year and 19bn m³ in 2022—by 2025 it will ramp up to 38bn m³. It will also have a long-term impact on gas market dynamics in China and the wider Eurasian region.
During Chinese president Xi Jinping’s 2013 visit to Moscow, Russian president Vladimir Putin agreed to deviate from a longstanding insistence on building a Western Siberian/Altai route from its existing gas fields to China’s north-western regions, ending a 10-year negotiations deadlock. The Western route would have provided Moscow with greater leverage over gas movements between Asian and European markets, and saved billions on the appraisal and development of new fields.
Similar to a number of Gazprom’s new supply routes to Europe, PoS is not primarily a commercially-driven pipeline. Analysts from Russia’s Sberbank noted in 2018 that, under no circumstances, will the $55.4bn investment, including major contracts to companies owned by Putin associates, pay off. At an oil price of $65/bl, net present value (NPV) runs a loss of up to $11bn.
Growing Chinese gas demand could be covered by a second branch of PoS to northwest China. But Russia would have to make further concessions on price or involve Mongolia, a longer and, due to a transit fee, more expensive option for Moscow. Beijing has recently signalled growing interest in the Mongolia stretch.
Despite higher construction and development costs for the eastern route, Beijing managed to exploit Moscow’s vulnerability and beat down the price to around $8-9/mn Btu, dependent, of course, on oil prices. While slightly above Turkmenistan-China gas prices, deliveries to China will be below Russia’s sale prices to Europe at the same oil price, and below the average price China pays for its oil-linked LNG contract imports.
But, whereas PoS locks in Russia’s eastward gas exports for 30 years to come, China has not deviated from a pragmatic energy policy of diversified supply. China purchases pipeline gas from Central Asia (47bn m³ in 2018) and Myanmar (12bn m³). In 2018, China increased its LNG imports by 42pc to 74bn m³, with projected further expansion to 109bn m³ by 2025.
$8-9/mn Btu – PoS gas pricing
For energy security reasons, China has also ramped up domestic gas production and investment in LNG projects abroad. State-owned ‘big three’ oil firm CNPC and the state-owned investment vehicle Silk Road Fund hold a combined 29.9pc stake in Russian gas firm Novatek’s Yamal LNG project, which produces 16.5mn t/yr. In April, Novatek sold 20pc in its Arctic LNG-2 project, which will produce gas from 2023, to CNPC and fellow ‘big three’ firm Cnooc . And, in June, Novatek signed a preliminary joint venture deal with Sinopec, the third of the major Chinese state-owned firms, to distribute LNG and gas to Chinese consumers.
The trade spat between Beijing and Washington—as well as a deteriorating economic climate in China—will be a threat to the country’s LNG demand growth. China’s imposition of 25pc tariffs has resulted in US LNG imports falling to a minimum. Yamal LNG could fill this gap. However, Iran-related US sanctions against four Chinese firms, among them shipper Cosco, in September—which led to a sharp increase in freight rates to Asia—reminded China of the potential geopolitical and logistical vulnerabilities of LNG imports.
Reliable pipeline deliveries from Russia, without the involvement of any third-party transit countries, should therefore become more attractive. Only LNG on short-term contracts at lower spot prices may be an overall more attractive package than Russian pipeline gas once PoS pumps with full capacity.
PoS will also affect pipeline dynamics in Central Asia. Russia resumed imports of Turkmen gas, albeit in reduced volumes, after a three-year hiatus in April 2019. But plans to expand a three-branch 55bn m³/yr pipeline system running from Turkmenistan to China with a fourth spur (Line D with an additional 30bn m³/yr) have been stalled by a socio-economic crisis in Turkmenistan and costs associated with mountainous terrain in Tajikistan and Kyrgyzstan.
The arrival of PoS might lower efforts to finance the construction of Line D in Beijing’s list of priorities. Another gas evacuation option for Turkmenistan—the Tapi pipeline through Afghanistan and Pakistan to India—has thus far foundered on Taliban-related security concerns and rekindled tensions between New Delhi and Islamabad.
Beijing managed to exploit Moscow’s vulnerability
Russia’s resumption of Turkmen gas purchases, even in small amounts, might relieve some of the pressure on Ashgabat to pursue the trickier Line D or Tapi alternatives. In such a scenario, Russia would retain its hegemonic role on the Eurasian gas market. On the other hand, Moscow may be wary of overplaying its hand with the Turkmens, given that it may calculate silghtly enhanced prospects of a Trans-Caspian pipeline—allowing Turkmen gas to potentially access Europe through Azerbaijan and the ‘southern corridor’— following a Caspian Sea convention signed in August 2018.
But PoS has not shown Moscow’s ability to use pipelines as a geopolitical instrument in a great light. Beijing, capitalising on Russia’s strategic weakness, extracted price concessions. China has also not lent an initially pledged $25bn, meaning Russian taxpayers are effectively subsidising China’s diversification of energy supply routes.
The pipeline does, admittedly, helps Russian gas heavyweight Gazprom to expand its portfolio, hedge against US and European sanctions risks and against faltering demand in Europe, and potentially preserve its position as a low-cost buyer in the Central Asian region. But, owing to a lack of financial power and reciprocal leverage, the pipeline also appears to cement Moscow’s junior role in an economically asymmetric partnership.