Moscow has secured a legally binding agreement with China to develop the Power of Siberia 2 pipeline, a colossal infrastructure project intended to transport 50 billion cubic meters of natural gas annually from Siberia to northern China. This significant commitment has the potential to reshape energy relations not only in the region but globally.
The pipeline will extend approximately 2,600 kilometers, starting from the Yamal gas fields in Russia, traversing Mongolia before reaching China. Gazprom, Russia's state-owned energy behemoth, aims for the pipeline to operate for three decades, with gas deliveries anticipated to commence by 2030.
What are the details of this pipeline deal?
While Moscow presents this agreement as finalized, Beijing has taken a more cautious stance. The specifics related to pricing and construction timelines are still under discussion. China holds considerable power in these negotiations, particularly since Russia is seeking to compensate for lost gas revenues from the European market following the geopolitical tensions initiated by the invasion of Ukraine. China benefits from having numerous alternative suppliers in addition to a growing liquefied natural gas (LNG) import market. The extensive capacity of the pipeline means China could secure a large source of piped gas, giving it the leverage to negotiate competitive pricing.
Once fully operational, Power of Siberia 2, combined with the existing Power of Siberia 1 pipeline, could boost Russia's gas delivery capacity to China to near 100 billion cubic meters per year. For China, obtaining this gas via land routes offers a strategic advantage, reducing reliance on maritime LNG, which is vulnerable to disruptions at critical points such as the Strait of Malacca. This extensive pipeline system could fulfill over 20% of China's gas needs by the 2030s.
How does this relate to the de-dollarization trend?
The agreement for the Power of Siberia 2 pipeline aligns with a broader shift towards conducting energy transactions between Russia and China without utilizing the US dollar. With Russia increasingly isolated from dollar-based financial systems due to Western sanctions, there is a growing trend to use the Chinese yuan for these transactions. Notably, the current Power of Siberia 1 is already operating on yuan settlements. If the new agreement locks in yuan-based pricing for a 30-year period, it would herald one of the largest non-dollar energy contracts by volume in history. Furthermore, China is already testing the use of its digital currency, the digital yuan, in cross-border energy transaction trials, and a deal of this magnitude could speed up its adoption.
What does this mean for investors?
For investors, formalizing the Power of Siberia 2 pipeline under yuan-based pricing carries significant implications. Should China secure 50 billion cubic meters of affordable piped gas from Russia, its need for seaborne LNG could decline. This shift may result in an increase of LNG availability for other regions such as Europe and Asia, potentially leading to lower energy costs where electricity prices are critical, for instance, for Bitcoin mining operations.
As negotiations surrounding pricing continue, it's crucial to monitor this closely. If China manages to secure steep discounts on pricing, it could indicate that Russia's bargaining position is more fragile than it publicly conveys.