Vladimir Putin’s touted “friendship without limits” with China has reached at least one limit—Beijing is not committing to a massive new energy project to import Russian pipeline gas unless it’s favorable for the world’s second-largest economy.
Russia has been trying for years to get China to commit to a new natural gas pipeline from the massive fields in Western Russia to China via Mongolia. The proposed Power of Siberia 2 pipeline, despite Russian assurances, is nowhere near a concrete commitment from China on the price and volumes at which the Russian gas would be imported.
China is negotiating from a position of strength after becoming Russia’s key gas customer and key trade partner in all other areas following Putin’s invasion of Ukraine, which severed decades-long gas supply relations between Russia and Europe.
Having lost most of its European market, Russian gas giant Gazprom turned to China to compensate for lost sales volumes. So far, it has failed.
The current volumes of gas exports to China cannot offset the lost European sales, while China is exacting a hefty price for planned additional volumes—it seeks huge discounts and has refused to commit to all the volumes that Power of Siberia 2 would offer.
Beijing seeks a deal, but not at any price. China has reportedly asked for a price of Russia’s gas close to the heavily subsidized domestic Russian prices, sources with knowledge of the matter told the Financial Times early this month. China has also signaled it would commit to purchasing just a fraction of the proposed pipeline’s annual capacity of 50 billion cubic meters of natural gas, per FT’s sources.
Last month’s visit of Putin to China failed to resolve the issue despite the camaraderie on display.
Russia and China expect to finalize soon the preliminary work on the natural gas link Power of Siberia 2 and sign an agreement on the pipeline’s construction, Russian Deputy Prime Minister Alexander Novak said in China.
Currently, Russia supplies pipeline gas to China via the Power of Siberia pipeline, one of the biggest projects recently completed by Gazprom and the first conduit for Russian gas to China. Now, there’s talk about the Power of Siberia 2, but negotiations between Russia and China haven’t progressed much, and they certainly didn’t progress during Putin’s visit to China in May.
While Putin was in China with Russia’s key energy official Alexander Novak, the chief executive of Gazprom, Alexey Miller, was nowhere to be seen. His absence was “highly symbolic” as his presence would have been crucial for any specific in-depth talks on a Power of Siberia 2 agreement, Tatiana Mitrova, a research fellow at Columbia University’s Center on Global Energy Policy, told FT.
Instead, during Putin’s trip to China, Miller visited Iran for high-level meetings with Iranian energy officials, including the petroleum minister of the Islamic Republic.
Gazprom has been one of the biggest losers of Putin’s geopolitical choices over the past two years.
Russia has seen its gas exports to Europe significantly reduced since the invasion of Ukraine.
Before the war, Russia supplied around one-third of all the gas to Europe.
Last year, Gazprom’s pipeline gas exports to Europe slumped by 55.6% compared to 2022.
As a result, Gazprom booked its first annual net loss in 23 years for 2023, signaling a significant shift in financial performance attributed to dwindling gas shipments to Europe and pricing pressures.
The invasion of Ukraine has badly hurt the gas sales and market share of the Russian giant, which may not recover lost sales volumes and revenues for more than a decade, or ever, according to a third-party report commissioned by Gazprom’s executives and reported by the Financial Times earlier this month.
Now, Gazprom’s efforts to secure additional sales to China have hit a snag, and China is signaling that it will not be Beijing that will pay the price for Russia’s attempts to boost its gas exports to the East.
By Tsvetana Paraskova for Oilprice.com