Russia Continues to Grapple With Multiple Pipeline-to-China Challenges

Russia has dreamed for years about capturing a significant share of China’s huge natural gas market. But getting there has been like slogging through deep Siberian snow. An important step will come before the end of this year, when Gazprom begins the second phase of construction of the Power of Siberia pipeline (Gazprom.com, accessed October 10). However, tough negotiations are stalling progress on an additional pipeline linking Russia’s rich Siberian fields and the industrial and population heartland of northeastern China. Making it worse for Russia is the fact that several global gas developments have given China more bargaining power. The two countries have yet to agree on the route of the Power of Siberia 2—or “Altai”—pipeline, how it will be financed, and the price China will pay for the gas flowing through it (UAWire, September 10).

President Vladimir Putin told Gazprom CEO Aleksei Miller, on September 9, to consider new route options to try to kick-start the project. One of his suggestions was for the state-owned gas giant to look again at the initially discarded idea of routing the pipeline through Mongolia (UAWire, September 10).

Russia and China started talks on the second pipeline in 2015—almost five years ago. The drawn-out time frame reflects Beijing’s willingness to be both patient and tough to achieve a favorable deal. It took ten years for Gazprom to win a Power of Siberia contract from the China National Petroleum Company (CNPC). And that was in the early 2000s, when China had a lot fewer import options than today. Since then, it has begun importing gas through pipelines from Central Asia and Myanmar that it helped finance and construct. Moreover, China has become the world’s second-largest importer of liquefied natural gas (LNG). The result is more Chinese leverage in the Power of Siberia 2 talks.

Another reason Gazprom wants an agreement on the second pipeline as soon as possible is that it is so expensive to develop a field at present that a company needs to find a buyer before beginning the work. Many of Gazprom’s projects in Siberia, the Arctic and elsewhere will be costly because of terrain, weather extremes and other challenges.

Adding to Gazprom’s Siberia 2 fervor is steadily growing international competition for the Chinese market. The world’s LNG production leaders—Qatar, Australia and the United States—are boosting their global exports, with China a key target. In addition, China has begun helping its western neighbors build the fourth section of the Central Asia–China pipeline so that it can import more gas from Kazakhstan, Uzbekistan and Turkmenistan (see EDM, October 2).

Another challenge Russia faces is where the gas for Power of Siberia 2 will come from. The field(s) must be big enough to provide China with 38 billion cubic meters (bcm) of gas a year for 30 years. Putin has suggested three fields—Chayandinskoe (Gazprom.com, accessed October 10), Kaviktinskoe and the Yamal Basin (Gazprom.com, accessed October 10). Together, the Chayandinskoe and Kaviktinskoe fields have more than 4 trillion cubic meters of reserves, more than enough to accommodate Power of Siberia 2—if it were the only pipeline they were supplying. But the fields are already booked to supply 1 trillion cubic meters of gas to the first pipeline. In addition, they will feed the Amursk Gas Processing Plant, which will boast an annual capacity of 45 bcm.

Gazprom’s giant Bovanenkovskoe field, near the Kara Sea, has huge reserves, too. But unlike the Chayandinskoe and Kaviktinskoe fields, it is on the Yamal Peninsula, far from the Chinese border. The pipeline that Gazprom would have to build from Bovanenkovskoe’s trunk line to China would be expensive because much of it would have to go through permafrost, where it is tricky to anchor in. Environmentalist protests had already forced Gazprom to change the Bovanenkovskoe trunk line’s route once, to prevent sending it through the Ukok Quiet Zone, a UNESCO World Heritage site (Nezavisimaya Gazeta, September 9).

The Mongolia option (see above) would eliminate the Power of Siberia 2’s permafrost challenge but would pose other problems. It would have to be longer to reach China, increasing its cost. In addition, Mongolia would seek a gas transit fee, 30 years of which would have to be figured into the pipeline’s already-expensive equation.

Russia has made no secret of wanting to broaden its commercial ties with China, which it sees as generating strategic as well as economic benefits (see EDM, June 12, 21, September 9). But it has been a challenge to take its mega-project plans with Beijing from the drawing board to the construction site. Moscow is certain to breathe a sigh of relief when the tough Power of Siberia 2 negotiations are over, so that it can simply concentrate on laying the pipeline.