Mongolia doubted the timing of the start of construction of the Power of Siberia-2 gas pipeline

New gas pipeline from Russia to China gets stuck in the steppes

The construction of the additional Russian-Chinese gas branch “Power of Siberia – 2” risks encountering unexpected obstacles. As the Financial Times reports, citing Mongolian Prime Minister Luvsannamsrain Oyuun-Erdene, Moscow and Beijing have not yet agreed on the division of financial profits that each party will receive if the project is implemented. Disagreements can delay the start of creating a route indefinitely.

The reasons for the delay in the start of construction of Power of Siberia 2 are world gas prices, which over the past two years have both soared to record levels and fallen to minimum levels. Peak prices of almost $4,000 per thousand cubic meters were recorded in 2022, when most European countries decided to abandon the import of Russian “blue fuel”. Now a thousand cubic meters on the European market are relatively cheap – a little over $320. According to the head of the Mongolian government, jumps in energy prices have complicated negotiations between Moscow and Beijing. “The parties need time for detailed studies – carrying out calculations and working on economic benefits,” believes Oyun-Erdene, emphasizing that after eliminating the contradictions, Ulaanbaatar will join the construction of the pipeline.

Let us recall that the idea of ​​​​building the “Power of Siberia – 2” gas route arose in the mid-2010s, when Russia and China began creating the first similar export route. Beijing has expressed interest in expanding hydrocarbon supplies from our country in the next 10-15 years. The capacity of the additional pipe met the needs of the Chinese economy, so preliminary agreements were reached to lay another energy line. The throughput capacity of this gas pipeline promises to be 50 billion cubic meters per year, which will more than double the supply of Russian “blue fuel” to the Asian market (supplies via Power of Siberia – 1 in 2023 increased to almost 23 billion cubic meters, while the possibility of the first export channel should increase to 38 billion in 2025).

The length of the second line may exceed 3.5 thousand km, most of which will pass through Russian territory. It is not for nothing that Ulaanbaatar pays increased attention to the timing of the start and completion of construction. During the development of technical conditions for laying the pipe, Mongolia was chosen as an intermediate and more profitable route: at least 950 km of the pipeline should pass through the lands of this state, which will save the project participants – Gazprom and the Chinese CNPS – several billion dollars. It was assumed that construction of the route would begin in 2024 and be completed at the end of 2029. As Russian Deputy Prime Minister Alexander Novak recently announced, a technical and economic analysis of the project has already been completed, during which the resource base and preliminary parameters have been determined. He emphasized that the timing of the construction of the gas pipeline and the main economic indicators will become completely clear after the signing of agreements with Chinese partners.

Industry experts shared with MK their views on the situation surrounding the new gas export route from Russia to China.

Artem Deev, head of the analytical department at AMarkets:

“The issue of investment in infrastructure construction is currently being discussed. To put it simply, China and Russia are trying to agree on who will pull their part of the pipe to what point. The interests of the Mongolian side are quite obvious: firstly, Ulaanbaatar will receive a fee for the transit of hydrocarbons through its territory, which could amount to $1-2 billion annually; secondly, a new infrastructure convenient for all project participants will appear; thirdly, Mongolia can negotiate special supply conditions for itself and receive gas somewhat cheaper. Moscow and Beijing expect that Power of Siberia 2 will be built before 2030. This period is acceptable for Chinese industry, which is increasing production capacity. Russia hopes to use the additional pipeline to recoup the costs of the loss of Nord Stream. Compliance with the construction schedule is beneficial to all parties. I believe that during 2024, all organizational issues will be agreed upon, and at the end of this, or at the beginning of 2025, construction can begin.”

Vladimir Chernov, analyst at Freedom Finance Global:

“As reported in December 2023, negotiations between Russia and China were delayed amid discussions on the financial part of the agreement. In particular, China wants Russia to bear all the costs of building the Power of Siberia 2. It is this issue that forces the start of construction to be delayed and requires additional discussions. It is also likely to discuss a discount when concluding long-term contracts for the supply of raw materials. Russia is interested in building a gas pipeline as soon as possible in order to redirect all lost fuel export volumes from the West to the East. Therefore, I believe that Moscow can make financial concessions to Beijing and speed up the process.”

Artem Tuzov, director of the corporate finance department at IVA Partners:

“The Financial Times is not a reliable source of data on negotiations either between Russia and China, or on Mongolia’s participation in this dialogue. Mongolia itself, as a transit country, also most likely does not have all the information on the process of agreeing on the terms of the transaction. A possible point of contention may be the final cost of energy: China appears to be demanding a significant discount on hydrocarbons, taking advantage of the fact that it is one of Gazprom’s main clients. This is part of the commercial negotiations that always accompanies major agreements. Neither China nor Russia want a repeat of the unpredictable rise in gas prices that occurred in the EU in 2022.

In turn, Mongolia is interested in being a reliable neighbor of both Russia and China. In addition, Ulaanbaatar hopes for constant income from transit payments. Mongolia does not have the financial resources and engineering competencies to create its part of the gas pipeline. Construction will be carried out by specialists from Russia and China. It is hoped that the timing of the project will remain unchanged: the forecasts received in January do not yet indicate significant shifts or postponements in the time frame for the start of construction.”