Russian Energy Minister Alexander Novak earlier this year confirmed that Moscow plans to replace the damaged Nord Stream 2 gas link to Europe with its Asian project to China.
Russia began supplying natural gas to China in December 2019 as part of a $400 billion contract signed in 2014 by Russian gas giant Gazprom and China National Petroleum Corp. This contract was signed for a period of 30 years.
By 2021, Russia had already supplied 10 billion cubic meters of natural gas to China. These supplies of natural gas from Russia had been used in northeastern China’s Heilongjiang province, Beijing and Tianjin.
Now, China and Russia are closing in on the completion of a new pipeline that will send natural gas from Siberia to Shanghai. The pipeline on the Russian side is called Sila Sibiri or Power of Siberia. This new pipeline (3,000 km long) will connect Eastern Siberia to Shanghai in Eastern China. Initial test flows will begin on October 25 with the flows being used to stress test pipeline joints.
The pipeline runs along the eastern edge of China, through the capital Beijing, and all the way to Shanghai. The middle phase began operating in December 2020, while the final southern section is scheduled to start delivering gas in 2025, according to Chinese state media.
Important liquidity outlet for Russia
While Gazprom and China National Petroleum Corp. have been working together since 2014, no one would have predicted the importance of the interconnection in 2022. Today, Russia is at risk of losing gas supply contracts from the EU (European Union) and the associated country for the annexation of Ukraine. This may affect 2/3 of its total gas purchases. On the other hand, China is looking carefully at sourcing its energy resources from multiple channels and providers.
While natural gas supplies have continued since 2019, volume has accelerated only now, following Russia’s war in Ukraine. This appears to be a very cunning strategy by China to exploit Russia’s weaknesses. China also has the option of importing natural gas from another supplier, Turkmenistan, which supplies a larger volume to China.
China and Russia are also in talks to build another pipeline that would likely cross Mongolia, further reducing the overall cost and time of transporting natural gas. While the Power of Siberia 1 line runs all the way to Vladivostok, Russia (east of China), the new line can bisect the entire region by crossing Mongolia.
The new dedicated line will run from the Yamal-Nenets region through Mongolia to China and will be able to transport up to 50 Bcm per year and will be called Sila Sibiri 2 or Power of Siberia 2. If all goes well, construction activities may begin in late 2024 or early 2025 and can only be completed by 2030.
Transactions in rubles, yuan
Gazprom and China National Petroleum Corp also agreed to pay each other in rubles and yuan as part of a policy to reduce their reliance on the US dollar and euro.
The new payment mechanism is a mutually beneficial, timely, reliable and practical solution, Gazprom CEO Alexei Miller said in a statement after a video conference meeting with the head of Chinese oil group CNPC Dai Houliang).
Is China re-exporting Russian gas to the EU?
Natural gas storage in Europe is currently about 80% full, partly due to Chinese LNG exports. According to China’s export data, Chinese LNG companies have significantly increased gas exports this year thanks to the gap created by the absence of Russian imports to the EU. Reports indicate that 7% of EU gas consumption was met by Chinese imports. This has raised a question as to whether China is re-exporting Russian gas to the EU.
If things continue this way, Russia may send more gas supplies to China due to China receiving more gas export requests from the EU. In the end, Russia may somewhat offset the lack of orders in a degree and China could benefit greatly from the resale of Russian gas supplies.
Diplomatic experts feel given Russia’s desperation, there is little it can do to see China make profits on its behalf. But they also feel that Russia should be patient as China can never be a partner as big as Russia for the EU to provide its energy supply. The EU also has other partners that will try to fill the gap, namely Norway, Turkmenistan, Qatar, Israel and maybe even Iran in the future.
