China and Russia signed an agreement to build the Power of Siberia-2 pipeline on September 2, a key step forward for one of the world's most expensive gas projects.
Russia’s pipeline gas monopoly Gazprom announced the deal as President Vladimir Putin met with Chinese leader Xi Jinping in Beijing ahead of a high-profile military parade, saying that the two sides had signed a legally binding “memorandum of construction” on the long-awaited pipeline.
While the announcement shows that the project has received political blessing from up high, Alexei Miller, the CEO of Gazprom, said that China and Russia have yet to agree on pricing details for the pipeline and how its costs will be shared, which have been stumbling blocks in the negotiations for years.
“Talks will now focus on financing the pipeline’s construction and the commercial terms of supply,” Miller said in Beijing. He promised to “provide the commercial details” separately.
Even with only the document that covers general terms, the deal to proceed with the 50 billion cubic meter per year (bcm) project will have major ripple effects through the global gas market while also helping to shape the course of Beijing and Moscow’s deepening relationship.
The new pipeline would bring gas from the huge Yamal Peninsula reserves in western Siberia to China, the world's top energy consumer and a leading gas customer, after passing through Mongolia.
But with the commercial details of Power of Siberia-2 not yet agreed, Russia will still have to grapple with several key issues that have enveloped the pipeline’s future.
Moscow needs the Power of Siberia-2 to compensate for at least part of the European Union market it has lost due to fallout from the war in Ukraine. Russia’s bargaining power with its more economically powerful neighbor has also weakened over the course of the war in Ukraine and questions remain over Gazprom's ability to underwrite such a complicated infrastructure project.
Miller said that the price for gas would be lower than the price charged by Gazprom to European buyers due to the vast distances and terrain over which pipelines had to be built, but no specifics were offered.
It’s also unclear who will build the pipeline.
After Putin met Xi and Mongolian President Ukhnaagiin Khurelsukh in Beijing, the Kremlin said that 22 agreements had been signed during Chinese talks, including a deal on strategic cooperation between Gazprom and China National Petroleum Corporation, but no further details were provided.
'Hard Connectivity'
China has so far not commented specifically about the memorandum on the new pipeline, but Chinese state media quoted Xi after the meeting with the Russian and Mongolian presidents saying that “hard connectivity’ should be a key direction, by actively promoting cross-border infrastructure and energy projects linking the three countries."
Russia is already the largest supplier of pipeline gas and the third-largest provider of liquified natural gas (LNG) to China after Australia and Qatar. Gazprom currently supplies natural gas to China through a 3,000 km pipeline called the Power of Siberia, which became operational in 2019 under a 30-year, $400 billion deal.
Putin and other world leaders are currently in Beijing to observe a military parade on September 3 commemorating the 80th anniversary of Japan’s defeat in World War II.
The parade and gathering of leaders comes amid a week of high-level diplomacy for Xi, who also hosted more than 20 top officials for the Shanghai Cooperation Organization in Tianjin where he looked to portray China as an alternative global leader to the United States.
