Russia’s planned gas mega-pipeline to China hit by construction delay

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Construction on the Kremlin’s long-planned mega-pipeline connecting Russia’s western gasfields with China is expected to be delayed, the prime minister of Mongolia has warned, in a blow to Moscow’s plans to secure a new market for the gas it previously sold to Europe.

The so-called Power of Siberia 2 pipeline, which will cross Mongolian territory, has been a priority for Moscow for more than a decade but gained even greater importance since Europe curbed its imports of Russian gas in response to the full-scale invasion of Ukraine in 2022.

Mongolia’s prime minister Luvsannamsrain Oyun-Erdene previously told the Financial Times that he expected construction of the 3,550km pipeline, including 950km through Mongolian territory, to begin in 2024. Asked whether the partners will stick to that timetable, he said that Russia and China are yet to agree on critical details of the mammoth infrastructure project.

“Those two sides still need more time to do more detailed research on the economic studies,” Oyun-Erdene said in an interview, adding that record global gas prices during the past two years had complicated negotiations. “The Chinese and Russian sides are still doing the calculations and estimations and they are working on the economic benefits.”

Russia’s deputy prime minister Alexander Novak wrote in the state-backed magazine Energy Policy on Thursday that the timing on construction will be finalised after signing binding agreements with Chinese partners.

Russian President Vladimir Putin and Chinese President Xi Jinping met at least twice last year, but while Russia has repeatedly emphasised its readiness to launch PS-2, Beijing has been conspicuously silent.

China already receives gas from eastern Russia through the first Power of Siberia pipeline, which began operating in 2019. It carried approximately 23bn cubic metres of gas last year and is expected to reach full capacity of 38 bcm in 2025.

PS-2 would bring an additional 50 bcm of gas to China from fields in the Yamal peninsula in western Siberia, which previously served Europe. Russia’s state-owned Gazprom started a feasibility study for the project in 2020 and wants the pipeline to be operational by 2030. It hopes China can replace Europe as the biggest export market for its gas. Europe used to buy more than 150 bcm of Russian gas a year, but flows have dwindled since the February 2022 invasion.

Sergey Vakulenko, a former strategy director for Gazprom Neft and a senior fellow at the Carnegie Endowment for International Peace, said Russia was likely to be seeking better financial terms from China than it had achieved in the PS-1 contract, signed in 2014 when global gas prices were much lower.

Although the terms of the PS-1 contract are not publicly available, Vakulenko’s analysis of Chinese government payment data suggests Russia is paid significantly less than Turkmenistan or Uzbekistan, which also supply gas to China.

“On one hand it’s a no-brainer for the Chinese, they should have this gas. On the other hand, there is Russia with stranded gas, lots of it, and which wants better terms,” he said “I guess it’s a bit of horse-trading at the moment.”

China’s foreign ministry did not comment directly on the negotiations but said that natural gas is an important aspect of Sino-Russian energy co-operation.

“Both sides have consistently conducted co-operation in the field of natural gas based on the principles of mutual respect and mutual benefit,” the ministry said in a statement to the FT. Gazprom and the Kremlin did not respond to requests for comment.

Wei Xiong, a senior analyst with Rystad Energy in Beijing, said local industry in China was still banking on PS-2 beginning operations in 2030 to meet rising Chinese demand.

“Although prices [for piped gas] have increased in the past couple of years, they are still much lower than LNG imports,” she said, referring to the liquefied natural gas that arrives in China by boat from countries including Australia and Qatar. “In the long term China needs both to keep gas supplies diversified — that is a very important part here.”

Oyun-Erdene said he had met the Russian and Chinese prime ministers in the Kyrgyzstan capital Bishkek in October. “We are still in discussions with those two sides and we are ready to commence once those two sides are ready to start construction.”

Mongolia, which is landlocked between China and Russia, has been working to also encourage investment from other countries to diversify its economy and serve as a buffer against Beijing and Moscow. In June it signed a trilateral agreement with the US and the Republic of Korea to collaborate in areas including mining and energy security.

UK-listed Rio Tinto operates the Oyu Tolgoi copper mine, the largest foreign direct investment in the country, while France’s state-backed Orano is aiming to develop Mongolia’s first uranium mine.

“We always stand for a co-operation between other countries,” said Oyun-Erdene, who made official visits to both Beijing and Washington in 2023.

Additional reporting by Edward White, Ding Wenjie, Max Seddon and Anastasia Stognei