It also entrenches further Russia‘s role as a mere supplier of energy and raw materials to China and solidifies its dependence on Chinese consumer goods
China‘s Chariman Xi Jinping and Russia‘s President Vladimir Putin seen as they speak via video link during a joint press conference on December 2, 2019 [AP Photos] [The Associated Press] On December 2, China‘s Chairman Xi Jinping looked very pleased as he presided over an elaborate ceremony in Beijing inaugurating a new cross-border pipeline, the Power of Siberia, supplying natural gas from Russia.
Russia‘s President Vladimir Putin, on the other hand, looked gloomy as he watched the proceedings via video link from Moscow.
The Russian president had reason to appear concerned about his new pipeline even though he referred to it as a ” historic event “. The volume of natural gas the Power of Siberia is to deliver in 2020 will be just a modest 5 billion cubic metres (bcm) per year, less than two percent of China‘s national consumption. Even if (and this is a very big “if”) the pipeline reaches its full capacity of 38 bcm by 2025, it will contribute just about nine percent of China‘s expected gas demand, at best. This is a far cry from Moscow‘s dream of making China dependent on Russian gas deliveries.
Unprofitable project The Power of Siberia is one of three major pipeline projects (along with Nordstream-2 to Northern Europe and TurkStream to Turkey) Russian state-owned energy company Gazprom has undertaken in the past few years. It took Moscow over a decade of frantic negotiations to persuade Beijing to agree to the deal; Gazprom and the China National Petroleum Corporation (CNPC) finally signed it in 2014.
Yet the project does not appear to be as grand a success as Moscow would have liked it to be. To begin with, the capacity of gas production on the Russian side of the border is open to doubt. The Chayanda gas field in Yakutia region, currently the only source of gas for the pipeline, can produce up to 25 bcm a year.
To deliver 38 bcm to China, Gazprom has to develop another large field, Kovykta in the Irkutsk region some 800km south of Chayanda, and connect it to the Power of Siberia with another pipeline, which has not been built yet. The completion of the infrastructure needed for pumping the required volume to China is probably going to take more than 10 years, according to Gazprom’s pre-feasibility study of the project.
Another important, and unpleasant for Moscow, issue is the cost of the project which currently stands at $55bln. In 2014 Gazprom invited its Chinese counterparts to co-finance the Power of Siberia and even announced that China agreed to provide up to $25bn , but it turned out to be wishful thinking .
Addressing Russian politicians in April 2015, Deputy Minister of Energy Yuri Sentyurin said that the Power of Siberia is not about “investing in a project which has to pay off its costs”. In May 2018, Sberbank CIB investment advisory group released a report which put under question the profitability of the project.
It pointed out that Gazprom chose the Power of Sibera over a much cheaper alternative – the Altai gas pipeline project – and that the main beneficiaries of this decision were the construction company contractors that were going to work on it.
The project is unprofitable even though the government has exempted it from the mineral extraction tax and property tax.
The Power of Siberia is also unlikely to add much to Russia‘s leverage in the energy market. When the deal was signed in 2014, Putin announced that in the future Russia‘s eastern gas pipelines would be connected to the western grid and it would be possible to switch the export flows from Europe to China and back depending on “the situation on the international market”.
Currently Gazprom sends westwards about 200 bcm annually via a number of pipeline routes. The Power of Siberia project, however, has a limit of 38 bcm and it is unlikely that another major pipeline project would be launched any time soon. Thus, the Russian company would not be able to switch export flows as it pleases.
Having a Chinese company as a single buyer of Russian gas at the far end of a very expensive pipeline is a big risk that erodes the possible commercial gains of the project.
CNPC has already proved to be a tough and capricious client. When another Russian state-owned energy giant, Rosneft, started delivering crude oil to China via a cross-border branch of the newly-built Eastern Siberia Pacific Ocean (ESPO) pipeline in 2011, the Chinese demanded a discount on the price and got what they wanted despite Russian protests . The same sort of behaviour is expected in the relations between CNPC and Gazprom. The single buyer enjoys a strong leverage in any argument.
Power relations The Power of Siberia will hardly have a big impact in terms of diversifying Russia‘s energy exports or giving it additional leverage to negotiate pricing. For China, on the other hand, it is a small, but welcome, addition to energy import diversification. The country already gets the majority of its gas from large pipelines from Central Asia and a smaller pipeline from Myanmar and two major LNG suppliers – Australia and Qatar. It is also working on a programme for developing indigenous resources, including shale gas.
All in all, the Power of Siberia is a big image-building stunt for Russia, but not a profitable commercial project, and it translates into a net loss for state-controlled Gazprom.
It also entrenches further Russia‘s role as a mere supplier of energy and raw materials to China and solidifies its dependence on Chinese consumer goods.
Prior to 1993, machinery and equipment accounted for sizable share of Russian exports to China, but today their share is 5 percent . On the other hand, 48 percent of Chinese exports to Russia are electronic appliances, machinery and tech equipment.
While Russia receives over 20 percent of all imported commodities from China, 2.5 percent of Chinese imports come from Russia. This is a one-sided trade relationship, which can hardly be corrected in the foreseeable future, especially given that Moscow continues to insist on boosting energy and mineral resource exports to China.
Thus the Power of Siberia – even if it appears as a great achievement on Russian TV screens – will not give Moscow a stronger hand in its relations with Beijing.
The views expressed in this article are the author’s own and do not necessarily reflect Al Jazeera’s editorial stance.
ABOUT THE AUTHOR Mikhail Krutikhin Mikhail Krutikhin is co-founder and partner of RusEnergy, a Moscow-based independent analytical agency.