Be skeptical about the big Russia-China natural gas deal
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There may be less than meets the eye with Gazprom's announcement Tuesday of a major, binding deal to build a massive Russia-to-China natural gas pipeline.
Why it matters: The agreement — if borne out — is a diplomatic win for Moscow after years of stalled talks over the Power of Siberia 2 project.
The big picture: It would mark stronger strategic ties between the powers and a wider Chinese market following steep declines in Russian exports to Europe since it invaded Ukraine.
- And it would also shrink a long-term market for U.S. LNG, which China has stopped purchasing of late. And China also recently started receiving gas from Russia's Arctic LNG 2 project.
- The reported agreement is big — a new, continent-spanning line to carry up to 50 billion cubic meters annually from Russia's Yamal Peninsula, along with more volumes through existing routes.
- For context, the U.S. exported roughly 123 bcm of LNG worldwide last year.
Reality check: To say the devil's in the details would be an understatement.
- Russian news services report that commercial pricing and project financing plans haven't been revealed.
"It's done when it's really done, when the two sides reach a price," said Jane Nakano of the Center for Strategic and International Studies, adding that talks over the smaller Power of Siberia 1 project extended many years.
- "The price will be the major, major challenge. This is only the beginning of the birth of Power of Siberia 2."
What they're saying: China has the leverage in negotiations, the Atlantic Council's Joseph Webster tells me.
- "Russia doesn't really have a major alternative overland outlet anymore because it has cut itself off from Europe," said Webster, a senior fellow with the think tank's Global Energy Center.
- And Russia's energy posture has weakened in other ways since the Power of Siberia 1 deal finally came together over a decade ago.
- Alternatives are increasingly available in China — think heat pumps and other tech — and China's domestic gas production is rising, he notes.
Between the lines: Webster was kind enough to riff on what might be happening behind the scenes, despite the unknowns.
- Moscow and/or Gazprom could be trying to show European buyers that they have alternatives, and it's a poke in the eye to U.S. LNG, he said.
- Webster also said it's possible Russia could lose money on the project, depending on the financing agreement.
- "But ... it's a major diplomatic win if they can agree to this, because it allows [Vladimir] Putin to demonstrate both to external audiences — especially in Europe, but perhaps more importantly, domestically — that he has international support, that he has backing from the world's second most powerful country."
The bottom line: While China's gas demand growth is slowing, Nakano agrees Beijing and Moscow both have geopolitical motivation to send a message.
- "This is another show of Beijing's defiance to the Western, and particularly U.S., pressure on China to reevaluate its ties with Russia."
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