“Power of Siberia 2? Xi punishes Putin’s mega pipeline with silence

“Power of Siberia 2” by Gazprom
Xi punishes Putin’s mega-pipeline with silence

By Christian Herrmann
4/2/2023 8:08 am

What will Gazprom do without Europe? Russia wants to deliver gas to China via three pipelines. But Xi Jinping doesn’t want to talk publicly about the new mega tube that Vladimir Putin is dreaming of. And with the other two projects, Gazprom shines with incompetence.

Russia’s energy business is booming – despite the attack on Ukraine. The valuable oil still ends up in India and, thanks to creative detours, probably also in Germany and Europe. The Russian state-owned company Gazprom is also swimming in money. In the first half of 2022, he generated 2.5 trillion rubles, which is the equivalent of more than 41 billion euros – a record. Overall, the profit could have increased to up to 80 billion euros. No one knows for sure: Gazprom has not published an annual report since the interim result for 2022.

Possibly because the record year could remain an absolute exception, as experts from Reuters have calculated that Gazprom’s exports fell by half after the attack on Ukraine last year. Profits had quadrupled – compared to previous years – only because of the ultra-high natural gas prices. However, they have now ended their high flight again, and natural gas is currently as cheap as it was last in August 2021, half a year before the start of the war. If Gazprom is to continue generating billions in profits for the Kremlin in the future, new markets are needed. The only major customers left are the domestic market, the CIS countries, Turkey and China.

But Vladimir Putin has already found the solution to his natural gas problem. During the visit of the Chinese head of state Xi Jinping to Moscow, the Russian president campaigned aggressively for two new pipelines to the People’s Republic. “In 2022, Gazprom fulfilled the wishes of the Chinese partners and even made additional deliveries above what was agreed,” Putin said. “That speaks for our company as a responsible and reliable supplier. Further growth will be made possible by the construction of the ‘Far East’ gas route and the implementation of ‘Power of Siberia 2’.”

Pipeline with Nord Stream capacity

Gazprom’s future lies in China. The “Power of Siberia 1” is already delivering: Last year, 15.5 billion cubic meters of natural gas flowed into the People’s Republic through the “Power of Siberia”. This year it should be twice as much. Compared to the Nord Stream 1, however, even that would only be half of what arrived in Germany every year.

A second, smaller pipeline is also under construction on Russia’s easternmost border. The Far East tube From 2026, the plan is to channel around 10 billion cubic meters of gas from the rich deposits of Sakhalin Island through the Sea of ​​Japan and land near Vladivostok in the extreme north-east of China. Putin called the project, which cost around 55 billion euros, the “business of the century” – and with the “Power of Siberia 2” the Russian president has something even better up his sleeve.

The “Power of Siberia 2” is currently perhaps the most important Russian infrastructure project. Once completed, the almost 100 billion euro tube will be 2,600 kilometers long. From 2030, it will transport 50 billion cubic meters of gas per year from western Siberia via Mongolia to China. It would thus reach the delivery volumes of the two Nord Stream pipelines – and would have more than doubled the Russian-Chinese capacities in one fell swoop.

“Putin needs good news”

Unsurprisingly, then, Vladimir Putin kept mentioning the pipeline during Xi Jinping’s visit to Moscow. Citing the Russian President, it has even been mentioned in the Russian media execution reported what actually but still not the case seems to be. Chinese state media didn’t even mention the pipeline after Xi’s visit.

Helwig Schmidt-Glintzer considers the Chinese silence to be a negotiating tactic, because it has not yet been clarified who will contribute to what extent to the construction costs. Xi probably also wants to keep a certain distance and not appear too pro-Russian, especially in the USA and Europe after the Russian attack on Ukraine, explains the director of the China Center Tübingen in the ntv podcast “Learned again”. Putin, on the other hand, must make the project palatable to his people.

“He needs good news,” says the sinologist. “Putin also wants to document that he is on good terms with China, because there is also a certain skepticism about the People’s Republic in Russia. And he is aggressively selling these plans to make it clear that he has the network that holds Russia together under control .”

China is well positioned

The last aspect in particular should also be important for China, because the People’s Republic may see Russia as a “discount gas station”, but also does not want to have an unstable giant state on its doorstep, in which part of the population will rebel against the state and possibly one day seeking reconnection with the West. That’s why Beijing is keeping a low profile on the Power of Siberia 2, but the project is not being denied either. For a stable rule, Putin needs reliable sources of income with which he can calm the population, Beijing knows that.

Nevertheless, China has much more leverage in the negotiations – above all because the new pipeline may not be needed at all. Analyst firm BloombergNEF reports that Chinese companies have signed more long-term supply deals than any other in the world. Qatar is one of the partners as well as Turkmenistan. The construction of a 30 billion cubic meter pipeline was only agreed with the former Soviet republic in September, while talks on the “Power of Siberia 2” have been going on for years, but no movement, as Maria Pasthukova of the E3G think tank explains.

“The reason is probably that the Chinese companies simply don’t see a great need for this Russian gas,” says the energy and geopolitics expert. “In addition, Russia offers little investment security for such large and long-term projects. Especially under this sanctions regime, Chinese companies are probably not willing to pump money into it.”

Gazprom miscalculated

The situation is different in the Kremlin: Just two years ago, Europe and Turkey bought Gazprom 175 billion cubic meters of natural gas per year. That was 80 percent of all Gazprom exports. The Russian financial service provider BCS expects that Gazprom will only be able to sell 65 billion cubic meters of natural gas in the Turkish-European region this year.

The state-owned company urgently needs new tubes. Also because he has apparently miscalculated himself several times in recent years. For example, Moscow and Beijing had already agreed in 2015 to build the Far East tube in the Sea of ​​Japan. But Gazprom is said to have preferred to send the special ships, which were bought especially for this purpose, to the Baltic Sea in order to be able to build the more lucrative Nord Stream 2.

This also applies to the construction of the “Power of Siberia 1”, according to the independent Russian investigative medium “The Insiders” reported. Because even if the pipe were to deliver twice as much natural gas to China this year as last year, that would only be half of what was actually planned: Gazprom should intentionally or unintentionally increase the size of the gas field from which the pipe is fed during development incorrectly stated have.

Mongolia as an emergency solution

That’s the only reason why the “Power of Siberia 2” will be 2,600 kilometers long: As an emergency solution, it has to take a detour via Mongolia so that Gazprom can connect it to the first line and then supply it with additional natural gas.

Xi Jinping is unlikely to kill Vladimir Putin’s pet project. But China will pay well for the Power of Siberia 2. Then everything depends on Gazprom – and the previous projects for and with China do not bode well.