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Russian mega-pipeline project to China hit by construction delay

Written by The Anand Market

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Construction of the Kremlin’s long-planned mega-pipeline linking western Russia’s gas fields to China is likely to be delayed, Mongolia’s prime minister has warned, dealing a blow to Moscow’s plans to obtain a new market for the gas it previously sold to Europe.

The Power of Siberia 2 pipeline, which will pass through Mongolian territory, has been a priority for Moscow for more than a decade, but it has taken on even greater importance since Europe reduced its imports of Russian gas in response to the full-scale invasion of Ukraine. in 2022.

Mongolian Prime Minister Luvsannamsrain Oyun-Erdene previously told the Financial Times that he expected construction of the 3,550 km gas pipeline, including 950 km crossing Mongolian territory, to begin in 2024. When asked if the partners would meet that timetable, he said Russia and China had not yet agreed on critical details of the mammoth infrastructure project.

“Both sides still need more time to conduct more detailed research on economic studies,” Oyun-Erdene said in an interview, adding that record global gas prices over the past two years had complicated the negotiations. . “The Chinese and Russian sides continue to make calculations and estimates and work on economic benefits.”

Russian Deputy Prime Minister Alexander Novak wrote in the state magazine Energy Policy on Thursday that the construction schedule would be finalized after signing binding agreements with Chinese partners.

Russian President Vladimir Putin and Chinese President Xi Jinping met at least twice last year, but while Russia has repeatedly stressed its readiness to launch the PS-2, Beijing has remained noticeably silent .

map showing gazprom's gas pipelines across asia, including the proposed power of siberia 2 project, running from the yamal peninsula inside the arctic circle through mongolia to northeast china .

China already receives gas from eastern Russia via the first Power of Siberia pipeline, which began operating in 2019. It transported around 23 billion cubic meters of gas last year and is expected to reach full capacity of 38 billion cubic meters in 2025.

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PS-2 would bring China an additional 50 bcm of gas from fields on the Yamal Peninsula in western Siberia that previously served Europe. Russian state-owned Gazprom launched a feasibility study for the project in 2020 and wants the pipeline to be operational by 2030. It hopes China can replace Europe as the largest export market for its gas . Europe previously bought more than 150 billion cubic meters of Russian gas a year, but flows have declined since the February 2022 invasion.

Sergey Vakulenko, former chief strategy officer of Gazprom Neft and senior fellow at the Carnegie Endowment for International Peace, said Russia would likely seek better financial terms from China than it got in the PS-1 contract , signed in 2014 when global gas prices were much lower.

Although the terms of the PS-1 contract are not publicly available, Vakulenko’s analysis of Chinese government payment data suggests that Russia is paid significantly less than Turkmenistan or Uzbekistan, which also supply gas to China.

“On the one hand, it’s obvious to the Chinese: they should have this gas. On the other hand, there is Russia which has gas blocked, in large quantities, and which wants better conditions,” he said. “I guess it’s a bit of bargaining at the moment. »

mikhail mishustin and luvsannamsrai oyun-erdene
Mongolian Prime Minister Luvsannamsrain Oyun-Erdene, left, and Mikhail Mishustin, his Russian counterpart. “The Chinese and Russian sides are still making calculations and estimates and working on the economic benefits” of the Power of Siberia 2 pipeline, says Oyun-Erdene © Dmitry Astakhov/Sputnik, Kremlin Pool/AP

China’s Foreign Ministry did not comment directly on the negotiations, but said natural gas was an important aspect of China-Russia energy cooperation.

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“The two sides have always carried out cooperation in the field of natural gas based on the principles of mutual respect and mutual benefits,” the ministry said in a statement to the FT. Gazprom and the Kremlin did not respond to requests for comment.

Wei Xiong, senior analyst at Rystad Energy in Beijing, said the local industry in China was still counting on the PS-2 starting operations in 2030 to meet growing Chinese demand.

“Even though prices (of transported gas) have increased over the past two years, they remain well below LNG imports,” she said, referring to liquefied natural gas that arrives in China by ship from from countries like Australia and Qatar. “In the long term, China needs to maintain diversified gas supplies – that’s a very important element here. »

Oyun-Erdene said he met with the Russian and Chinese prime ministers in Bishkek, Kyrgyzstan’s capital, in October. “We are still in discussions with both of these parties and we are ready to begin once these two parties are ready to begin construction.”

Mongolia, landlocked between China and Russia, is also working to encourage investment from other countries to diversify its economy and serve as a buffer against Beijing and Moscow. In June, it signed a trilateral agreement with the United States and the Republic of Korea to collaborate in areas such as mining and energy security.

British company Rio Tinto operates the Oyu Tolgoi copper mine, the largest foreign direct investment in the country, while French company Orano aims to develop Mongolia’s first uranium mine.

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“We always welcome cooperation between other countries,” said Oyun-Erdene, who made official visits to Beijing and Washington in 2023.

Additional reporting by Edward White, Ding Wenjie, Max Seddon and Anastasia Stognei