A few weeks ago, Gazprom CEO Alexei Miller announced that Moscow and Beijing had reached a binding agreement regarding the construction of the Power of Siberia 2 (PoS2) natural gas pipeline. The long-delayed project is expected to complement the existing Power of Siberia (PoS1) by building a new pipeline with a capacity of 50 bcm, as well as increasing the capacity of existing routes.
PoS1 transports natural gas from Yakutia, Eastern Siberia, to Northeast China; PoS2 will do the same from Yamal, Western Siberia, to Northwest China, passing through Mongolia. If this comes to fruition, assuming that the two pipelines are used at full capacity, Russia’s gas exports to China would exceed 100 bcm annually.
Implications for Russia
For Moscow, this represents a chance to avoid the underexploitation of one of its most important gas fields by redirecting energy flows from Europe to China. Nonetheless, the Chinese market cannot fully replace its European counterpart. For reference, in 2021, before Russia’s invasion of Ukraine, Russia exported about 155 bcm of natural gas to the EU, which is more than what it would be able to export to China even if both Power of Siberia pipelines were to run at full capacity.
Relying so much on the Chinese market also has its fair share of risks. Natural gas represents a smaller portion of China’s energy mix, especially in comparison to Germany, Europe’s largest consumer. Moreover, the future of natural gas consumption in China is unclear. Although China’s natural gas demand is expected to increase at least until 2040 and then remain stable for another decade, an accelerated development of alternative energy sources might change that. While it is more likely that this would come at the expense of coal usage, an exceptionally fast development of alternative energies could reduce Chinese demand for natural gas – a bridge fuel in the energy transition – more than expected. Both China’s leadership in the green technology industry as well as its supply-oriented energy security concerns could serve as catalysts in this development.
This is particularly problematic given the costly nature of the project. Just to recover the construction costs alone, two decades of the PoS2 working at full capacity will be needed. Even under unoptimistic forecasts regarding China’s transition, gas trade between Russia and China is likely to end by 2060. Thus, Moscow’s bet is one of high risk and debatable reward, as it is pitted against China’s planned energy transition. The PoS2 implies significant investment for a project with a limited useful life.
Finally, for Russia overreliance on a single buyer represents a strategic vulnerability in itself. Even without considering China’s energy transition conundrum, overdependence on the Chinese market will give Beijing the upper hand in any negotiation, since the natural gas market has a large number of suppliers and China is unlikely to put all of its eggs in one basket. Therefore, Moscow might end up having to accept a long-term contract with a low take-or-pay commitment and even lower prices than the ones China already pays (which are far lower than what EU countries used to pay).
That said, Moscow’s rationale might have been as – or even more – political as it was economic. Fundamentally, PoS2 demonstrates domestically and to the world Russia’s resilience against Western sanctions by showing that it still has a significant partner and export outlet. The project not only strengthens Russia’s position in the growing Asian energy market, but signals its intention to prioritize its special strategic partnership with China over short-term, tactical gains from the West in the context of the ongoing negotiations on Ukraine.
In that sense, Gazprom’s announcement looks like the first nail in the coffin of the popular “reverse Kissinger” idea. This notion holds that the Trump administration, much like Nixon’s government during the Cold War, could improve relations with one rival to contain another. U.S. President Richard Nixon reached out to China after the Sino‑Soviet split to balance against the USSR. By contrast, the “reverse Kissinger” thesis suggests Washington might try to win Russia over to contain China. The PoS2 memorandum, however, casts more doubt on that possibility.
Implications for China
For China, the situation is quite different. To begin with, PoS2 is an attempt to secure a cheap, long-term gas supply, which might play a pivotal role in transitioning out of coal in the upcoming decades. At the same time, it will likely reduce China’s exposure to the more volatile LNG market, where prices and infrastructure costs are generally higher, and the U.S. is now its most important exporter. As the world’s largest energy consumer, PoS2 represents an attractive option for China to hedge against future reliance on U.S. LNG. This has proven to be particularly relevant given Washington’s unreliability, as the new trade war elicited Chinese importers to cease any purchase of LNG from the United States.
Furthermore, because LNG is usually delivered by sea, PoS2, by reducing China’s future demand, slightly mitigates China’s primary energy security concern: the disruption of its sea lines of communication (SLOCs) either through the weaponization of maritime chokepoints – particularly the Straits of Malacca and Hormuz – by the U.S. Navy or the targeted attacks of other state and nonstate actors. The “Malacca Dilemma” is a critical concern in the context of a hypothetical China-U.S. confrontation. It has been a factor in the Chinese Communist Party’s strategizing at least since Hu Jintao’s era, and it is particularly relevant to China’s energy security as roughly 60-70 percent of Chinese energy imports pass through the Malacca Strait, including most of its LNG supply.
Supply chain disruptions in the Strait of Hormuz would also pose a critical threat to Chinese energy security, including its LNG supply, since about 29 percent of its imports pass through the strait. Unlike other straits that can be avoided by taking longer and more expensive routes, the Strait of Hormuz is the only way to access the Persian Gulf by sea, and therefore, the main way out for Qatari LNG exports. The recent tensions between Israel and Iran proved this point: after the military escalation that took place a few months ago, Iran’s parliament supported closing the strait, which represented a critical risk to China’s energy imports.
In addition, since Chinese LNG contracts involving about 75 bcm per year will expire in the next decade, the prospects of long-term, cheap Russian gas will give leverage to Beijing when negotiating for new contracts or extensions. This is another bearish factor for the market as at least 360 bcm/y of new LNG export capacity will enter the market next decade. The PoS2 is thus expected to expose portfolio players, particularly Australia and Qatar, but also the U.S., given that better and fewer new LNG deals by China, the world’s top importer, might depress prices in a context of increasing supply.
The deal offers China clear political and economic benefits. Politically, it signals that Beijing and Moscow maintain a strong relationship that can withstand Western sanctions, while also suggesting that China will rely less on U.S. LNG than expected. Economically, it secures cheap, long‑term natural gas supplies for decades to come. Furthermore, it gives leverage to China in future negotiations with Russia, as the former remains the buyer of last resort of the latter in a market with many alternative suppliers. Therefore, it is expected that China will pressure Russia on both price and volume.
Regarding price, it is unlikely that Beijing will agree to pay the same as it is paying for PoS1’s gas, since at the signing of that agreement Russia still had many export outlets, including several European countries. The key, distinct factor today is the war in Ukraine, as it left Russia more vulnerable to China’s influence. Hence, it is likely that China will demand historically low prices, probably close to Russia’s domestic consumption, making the project even less profitable for Gazprom.
When it comes to volume, one of the cornerstones of China’s energy security thinking is supply diversification. To operate PoS2 at full capacity, China would import between 126 and 136 bcm from Russia, which is almost half of its projected natural gas imports (including LNG) in 2040. Combined with the expansion of renewables and the falling costs of wind and solar energies in China, this is bad news for Moscow, as Beijing will probably push for a long-term contract with a low take-or-pay commitment. By doing this, Beijing’s gains would be threefold: it would secure a cheap gas supply while simultaneously avoiding overreliance on one supplier and maintaining its commitment to the energy transition.
The exact future of the PoS2 remains uncertain as there is still much to negotiate. Nonetheless, what is certain is that, once again, geopolitical rationales influenced energy decisions as much as purely economic ones. The soon-to-be-built pipeline is a political bet for Russia and a diplomatic success for China; one that has the potential to reshape the energy market in the next few decades.