How Russia-China Gas Pipeline Changes Energy Calculus

How Russia-China Gas Pipeline Changes Energy Calculus

Russia is pivoting its energy business to the east. The world’s largest exporter of natural gas has built an enormous pipeline running from Siberia to the Chinese border to feed China’s insatiable energy appetite.

The new conduit, called the Power of Siberia, is part of a plan by Russian President Vladimir Putin to reduce his country’s dependence on gas markets in Europe and tap into the fast-growing economies of Asia. For China, whose domestic energy production can’t keep up with demand, the pipeline offers a vital new source of supply.

1. What is the Power of Siberia?

Built by Russian energy giant Gazprom PJSC, the pipeline runs about 3,000 kilometers (1,864 miles) from the new Chayanda and Kovykta gas fields in the coldest part of Siberia to Blagoveshchensk, near the Chinese border. Another gas line in China connects to the Russian system and will eventually stretch another 3,370 kilometers south to Shanghai. The Russian part of the line is managed by Gazprom, which in 2014 signed a $400 billion deal to supply 38 billion cubic meters of gas annually for 30 years to China National Petroleum Corp. It’s the Russian company’s biggest ever contract.

2. What’s the status of the pipeline?

Gazprom filled it with gas in October, and the official launch is set for early December, when Putin and Chinese President Xi Jinping may appear in a joint video link at a ceremony to mark the occasion. Gazprom plans to start with deliveries of 10 million cubic meters a day and reach peak capacity in 2025. Russia may eventually expand the system to the west, allowing Siberian gas to flow in either direction.

3. Why is this link important to Russia?

The Power of Siberia provides a hedge against deteriorating relations with Europe. Until now, most of Russia’s gas production has gone west, much of it through pipelines in Ukraine. (Some volumes also travel by tanker in the form of liquefied natural gas, produced on the Yamal peninsula in northern Siberia and on Sakhalin island near Japan.) Russia and Ukraine have bickered for years over the transit fees, and on two occasions Russia turned off the gas in the middle of the winter. The political relationship between Russia and Europe has also become increasingly fraught since Russia seized Crimea in 2014 and the U.S. and Europe responded with sanctions. Meanwhile, Russia has vast untapped reserves of gas in its far east that are closer to China than to Europe.

4. Why does China want the Power of Siberia?

China is the world’s biggest energy consumer and importer. Russian gas will supplement output from China’s domestic fields and could be cheaper than LNG arriving in tankers. The two countries are already talking about a second link, known as Power of Siberia 2, which would serve the industrial areas on China’s east coast. China also operates the Central Asia-China Gas Pipeline, which brings gas mainly from Turkmenistan through Uzbekistan and Kazakhstan. Putin expects “colossal” growth in China’s energy needs will require more pipeline and LNG capacity, benefiting both Gazprom and Novatek PJSC, which is developing LNG on the Yamal peninsula in the Kara Sea.

5. Where does China get its gas now?

China’s gas consumption has surged over the past decade, up 33% in just the last two years, according to the International Energy Agency. Imports constitute a growing share, reaching 43% in 2018; around two-fifths of those came via the Central Asia-China Gas Pipeline, while the rest were LNG imports, mainly from Australia, Qatar, Malaysia and Indonesia. Demand has climbed as the government forced millions of factories and homes to switch away from coal to cleaner-burning gas to help tackle smog and reduce carbon dioxide emissions.

6. What does all this mean for Europe?

The Power of Siberia strengthens Russia’s hand in talks over gas contracts with European countries. If Russia can ship its output to the east instead, the west may need to pay more to ensure supplies. Separately, Gazprom is also opening a new pipeline underneath the Baltic Sea, known as Nord Stream 2, that doubles its capacity on an existing northern route. This will give Russia the means to bypass Ukraine entirely if tensions increase.

7. How will the gas be priced?

Putin has said that gas flowing through Power of Siberia will be linked to oil prices, similar to the system used by European buyers. The base price in the formula was set at about $360 per thousand cubic meters, close to the level in Gazprom’s contract with Germany, according to Russian officials. PetroChina said the price of gas supplied via the Power of Siberia will be competitive with deliveries from Central Asia.

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Olga Tanas, Anna Shiryaevskaya, and Dan Murtaugh es un sitio web oficial del Gobierno Argentino