Russia-China Gas Deal Disrupts Global LNG Flows | Shale Magazine

Russia and China have signed a binding deal to build the Power of Siberia 2, a long-delayed gas pipeline that will have the capacity to deliver 50 billion cubic meters (bcm) of gas for 30 years. The pipeline will span from western Siberia to northern China via Mongolia, an incredible feat of engineering. 

The arrangement marks a significant shift as Moscow seeks to strengthen its energy position after losing the European and American markets due to Western sanctions and import bans following Russia’s invasion of Ukraine. As the global flow of liquid natural gas (LNG) decouples from the West, the geopolitical and economic aftershock will be felt across the LNG market, pipeline politics, and strategic planning in Brussels and Washington. 

What’s in the Deal and What’s Not

According to Reuters, the Gazprom CEO announced that Moscow and Beijing signed a “legally binding memorandum” regarding the Power of Siberia 2, which entails approximately 50 bcm per year of pipeline gas from West Siberia to Northern China. The agreement entails a pipeline that will run through Mongolia, dramatically increasing supply under the existing arrangements. 

Furthermore, the arrangement includes a broader increase on the original Power of Siberia route, increasing the footprint and output. 

However, for now, key commercial building blocks remain in place, including price, financing, contractors, and construction timelines. These arrangements remain unfixed at this point, but should be agreed upon in the near future as the pipeline venture progresses. 

Although the agreement is legally binding, it doesn’t present the economic impact right away. Instead, it alters the LNG flow for future prospects, pointing to a future geopolitical and supply chain shift for the East. For China, the world’s largest consumer, this means less dependence on Western gas, positioning the world power toward Russia, it strengthens ties with its primary ally and circumnavigates Western sanctions and import bans. 

Russia’s Time Crunch with the European Union

The agreement between China and Russia comes at a pivotal point for the Russian economy as the European Union proposes ending Russian gas imports by the year 2027, according to a European Commission report in June. This decision comes from a broader drive to hamper or cut off Russian energy revenues tied to the war in Ukraine. 

Even if the Power of Siberia 2 were to operate at full capacity of 50 bcm per year, it would not entirely replace the energy revenues it’s lost or stands to lose from Europe. Still, it would shift the bargaining leverage for future sanctions and operations. If Russia strengthens its ties with China, securing financials for LNG imports, it limits the West’s power to leverage energy revenues as a negotiation fulcrum. 

With Europe planning to end imports of Russian LNG by the year 2027, Moscow is in a time crunch to move quickly towards China, both in terms of infrastructure and geopolitical ties. 

What China Gets Out of the Deal

When it comes to leverage, China holds a massive trump card, being the world’s largest consumer of energy. Reports indicate that China leverages its market power to negotiate favorable pricing and financing terms from Russia, giving it an edge over Moscow. 

China is not only the world’s largest consumer, but the world’s foremost energy importer.The pipeline deal poses a boon to the ever-growing Chinese energy demand. When combined with the rapid renewal, expansion, and nuclear power build-out, the Power of Siberia 2 pipeline deal grants China a potentially discounted core pillar of its energy mix. 

While pricing will be negotiated at a later time, it’s clear that Beijing will push for steep discounts, given its potential volume and near-exclusive buying desire for Russian energies. A lot is riding on the decision: the pipeline LNG cost will determine how costs are allocated, who funds the infrastructure, and how Moscow meets its financial needs.

Implications for the LNG Market at Large & U.S. Energy Ambitions

Major moves like this are never in isolation, and could have ripple effects throughout the global LNG market. A pipeline between Russia and China, in which China benefits directly from a direct source would mean it relies less on other import sources. With a significant portion of its LNG demands met directly from Russia, China would no longer require other exporters as sources, directly affecting nations that have aggressively targeted China as a significant energy consumer. 

The United States, under President Trump’s “energy dominance” ambition, would be directly impacted if China ceased to utilize American exports of LNG.

In 2024, China imported 105 billion cubic meters of gas as LNG, according to the Statistical Review. While only 5.8 billion of that came from the United States, significant portions came from Australia, to the tune of 35.8 billion. Another 25.2 billion came from Qatar. If China requires a lower import volume from these countries in the future, the United States will undoubtedly feel the ripple effect as those countries seek to replace the market they could lose to Russia.

While the demand for LNG remains strong, geopolitically shifting the export flow could radically complicate the matter, with potential uncertainty for future exports to the East Asian market. 

Negotiations Aren’t Out of the Woods Yet

Despite giving a blessing to the pipeline, negotiations are far from over. The agreement notably leaves financing and construction investment vague, providing room for potential bargaining in the future. Financially and structurally, a pipeline from Siberia to China is a massive undertaking, involving a considerable risk. Not only will contractors face the terrain challenges of the harsh Siberian and Mongolian environments, but the financial investment will be significant. 

It remains yet to be seen who will foot the bill for the pipeline, whether that will be considered in the past negotiation, and whether the mega-project can be completed within an agreeable time frame. 

Negotiating who will carry the construction risk and cost liability could take several years alone. Additionally, the potential for sanctions, both current and future, could be a deciding factor in which country bears the majority of the liability. 

What Comes Next

History tells us of several indicators to watch for in the following months and years for market and policy signals. These include:

1. 1. Pricing terms: China will seek to negotiate the best pricing terms for long-term pipeline LNG imports. However, a lower price could hamper Russia’s financial bottom line, especially given the European Commission’s movement to stifle Russian energy dependence for the EU.

• Financing and contractor: The next thing to be negotiated will be who will underwrite the mega-project and who will carry the construction liability. In the negotiation, this is a pivotal point, as it determines much of the infrastructure progression and construction timeline.

• A shift in LNG flow: As China benefits from Russian LNG, the global market could see a shift away from reliance on the current major exporters, including the U.S.
• European policy action: With the 2027 deadline posed by the European Commission, Russia is on a time crunch to finalize negotiations with China as quickly as possible. 

While the deal may be mutually beneficial for China and Russia, it could have a long-term and broad impact on the global market, introducing risk and a shift in the LNG flow. If the Power of Siberia 2 pipeline negotiations fare favorably for China, it will mark a significant change for the global energy flow.

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