Features | Economy | East Asia

China and Russia May Be Expanding Natural Gas Cooperation – Just Not Via Power of Siberia 2

Beijing and Moscow are more likely to cooperate in liquefied natural gas and Central Asian natural gas, not the Power of Siberia-2 pipeline.

China and Russia May Be Expanding Natural Gas Cooperation – Just Not Via Power of Siberia 2

Chinese President Xi Jinping, right, and Russian President Vladimir Putin shake hands during an awarding ceremony at the Great Hall of the People in Beijing, China, on June 8, 2018.

Credit: AP Photo/Alexander Zemlianichenko, Pool

Russia’s invasion of Ukraine has left Moscow with few trade alternatives other than China. Beijing thus continues to enjoy the upper hand in the bilateral relationship, including in negotiations over the long-planned Power of Siberia-2 (PoS-2) Russia-to-China natural gas pipeline. Beijing will dictate the tempo and outcome of the negotiations, which are highly unlikely to conclude prior to the “freezing” of the war in Ukraine, due to China’s desire to maintain functional economic relationships with the United States and, especially, Europe. Financing risks and a lack of mutual trust will also continue to constrain the project.

While PoS-2 negotiations will likely remain in stasis for the near term, and probably longer, it doesn’t represent the only or even most important vector of natural gas cooperation between Russia and China. Moscow and Beijing show signs of increasing bilateral natural gas flows via alternative routes, including indirect routes through Central Asia and via liquefied natural gas (LNG).

The West shouldn’t be too concerned about PoS-2, but must proceed cautiously in Central Asia. Washington and Brussels should actively oppose Sino-Russian LNG cooperation, but not before Europe’s winter heating season of high natural gas demand concludes in April 2024.

Why China Imports Natural Gas

Natural gas has improved China’s urban air quality, enhancing performance legitimacy and providing critical political security benefits for the Chinese Communist Party (CCP). From 2013 to 2019, the last full year of data prior to COVID-19, concentrations of particulate matter in Beijing fell by about 38 percent. Natural gas played a major role in reducing Chinese urban air pollution, and, more importantly from the CCP’s perspective, subduing a growing environmental movement.

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Environmental concerns, especially over tangible problems like urban pollution, can be dangerous for authoritarian regimes. Taiwan’s democratization struggle was closely linked to improving urban air quality, while Poland’s Solidarity movement enjoyed critical support from environmental groups. China experienced a growing – and for the CCP, dangerous – social environmental movement in the early and mid-2010s.

Although observed pollution levels in Beijing were actually higher in 2013 and 2014, according to air quality data from the U.S. Embassy in Beijing, popular and elite concerns over urban pollution in China likely peaked in early 2015, when the highly influential documentary, “Under the Dome,” was published and received upwards of 147 million views. The documentary was ultimately censored. As during the anti-COVID lockdown protests, the CCP responded to unrest by implementing policies that quelled public opposition but resulted in secondary consequences.

To reduce urban air pollution, the CCP applied stronger emission standards and control technologies while also displacing coal with natural gas, at least in metropolitan areas such as Beijing. While natural gas emits carbon and other greenhouse gasses, it also burns much cleaner than coal. Accordingly, China’s imports of natural gas more than quadrupled from 2011 to 2021, playing a major role in reducing its urban air pollution.

It’s unclear if the CCP’s perspective on the need for cleaner urban air – and natural gas – is shifting, however. As seen in the chart below, Beijing’s urban air quality index, or AQI, in 2023 has risen sharply in the post-COVID era and is even exceeding same-period levels from 2019, indicating that air pollution has increased (in AQI, higher scores are worse).

There are many factors behind the rise in AQI: north China suffered from a natural gas shortage this winter; Beijing experienced a cold winter, which is linked to more pollutants; and, of course, China’s post-COVID mobility boom produced more emissions. While it’s too soon to say if the CCP is willing to abide permanently lower air quality, or if rising air pollution is a temporary phenomenon, tolerating more urban pollution would reduce China’s willingness to import natural gas, and diminish its interest in the PoS-2.

China’s natural gas policy is determined by energy security and, most importantly, the CCP’s political security needs, which require reducing visible urban air pollution. Climate change per se is not a high priority for Beijing and has little impact on its natural gas policy, however. Indeed, a Chinese turn to Russian or, especially, Turkmen gas may actually accelerate climate change faster than coal.

Natural gas production in Russia and (especially) Turkmenistan is highly methane-intensive, and methane is 80 times more potent than carbon dioxide in terms of warming the climate system (although the compound is shorter-lived than carbon dioxide). There are few, if any, climate change benefits to switching from coal to Russian natural gas.

A Power of Siberia-2 Deal Is Unlikely

Beijing has few interests in securing a new natural gas pipeline deal with Russia in the near future. The CCP may be willing to tolerate lower natural gas consumption – and worse urban air quality – all things being equal. Beijing also judges, correctly, that inking the Power of Siberia pipeline deal with Russia will severely damage economic and political ties with the United States and, especially, Europe. Accordingly, Beijing will very likely delay any splashy and highly controversial Russia-to-China pipeline agreement until after the war in Ukraine subsides.

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A Sino-Russian agreement over PoS-2 would not only symbolically affront Europe: It could also damage its material interests. Russia’s natural gas basins that can service European demand would also be able to ship volumes to China, if PoS-2 is ever constructed. Therefore, Russia could hypothetically play the two consumers against each other, securing higher prices from Europe. Moreover, greater trade and investment flows with China would strengthen the Russian economy and, implicitly, the war effort.

The material risks of PoS-2, while significant, are less concerning to Europe than they were prior to the invasion, however, as the continent seems increasingly willing and able to reduce its exposure to Russian hydrocarbon exports. Moreover, Russia was saddled with financing the first Power of Siberia and would likely be forced to front costs again. Accordingly, Russia’s pipeline natural gas exporter, Gazprom, likely wouldn’t see any revenues from the project until its construction was completed – probably not until 2030 or even later.

The political reverberations of another Sino-Russian pipeline deal would be felt deeply in the West, however. While the material consequences of any PoS-2 deal may be less significant than generally assumed, an agreement would have enormous symbolic implications and shock the West. Announcing a provocative infrastructure megadeal with the Kremlin would signal that Beijing was shifting from “pro-Russian neutrality” to open support of Moscow, severely damaging China’s economic and political ties with the West for a generation.

While Beijing wants Putin to prevail in Ukraine, it shows no indication of wanting to risk a break with the West over an issue that is, from its perspective, a much lower priority than domestic economic stability and Taiwan, inter alia.

In sum, a new deal over the Power of Siberia 2 seems highly unlikely in the near term. Beijing doesn’t want to risk economic relations with the West over a secondary priority. Importantly, financing will be a sticky issue for both sides. The PoS-2 very likely won’t deliver volumes for at least another seven years, if not longer, so initial investments will bear considerable technical and geopolitical risks. Beijing doesn’t want to get stuck with the risk of up-front financing costs; it has real concerns about the long-term trajectory of Russian foreign policy, while Gazprom’s restriction of natural gas exports to Europe suggests it could use the same tactic in future disputes with China.

For its part, Moscow is also reluctant to finance the project, as it worries a new pipeline will become a “stranded asset” if China is able, over the long term, to deploy enough renewables and heat pumps to displace natural gas demand. If the two sides ever reach an agreement over the pipeline, they may have to co-finance the project. It’s not clear that Beijing and Moscow share that level of trust, however, or ever will.

Sino-Russian Natural Gas Cooperation May Take Other Forms

While a splashy new pipeline agreement seems unlikely any time soon, Moscow and Beijing are already exploring other, quieter ways of boosting bilateral natural gas cooperation. Russia is trying to export additional pipeline natural gas volume to Central Asia, enabling the region to transmit more to China. Additionally, Chinese equipment makers and service providers are facilitating the Russian LNG complex.

Russia finds it increasingly difficult to ship natural gas to Europe, leading it to consider shifting volumes to Central Asia. In November, Russian President Vladimir Putin proposed a “gas union” with Kazakhstan and Uzbekistan. This initiative seeks to raise Russia’s direct exports to Central Asia and, by fulfilling Kazakhstan and Uzbekistan’s natural demand, allow those countries to export surplus to China, indirectly establishing a Russia-to-China natural gas connection. Moreover, it would also use existing pipelines, ensuring Russia could access revenues more quickly. Negotiations over the gas union are ongoing, however, and Moscow is facing difficulties in reaching an agreement in Uzbekistan.

China has largely been quiet on the gas union negotiations, at least in public. Still, an article in the People’s Daily approvingly quoted Russian Foreign Minister Sergey Lavrov, who denied that the union was a “geopolitical game.” Beijing likely quietly supports these negotiations but prefers not to draw attention to its role, due to sensitivities involving Western sanctions and Russia’s traditional leading role in Central Asia.

Burgeoning Sino-Russian LNG cooperation is much more overt. Chinese yards are assembling modules for Russia’s Arctic LNG 2 project, while two Chinese companies are building turbines for the same project. The LNG industry is skeptical that Russia can complete Arctic LNG 2 without Western technology, while some analysts believe Russian will struggle to maintain even its existing facilities. Chinese engineering assistance and manufacturing support could enable Russian LNG to overcome these challenges, however.

How Should Washington and Brussels Respond?

Beijing and Moscow are unlikely to reach an agreement over the Power of Siberia 2 pipeline in the near future, and possibly ever. While the West should respond if a deal is announced, the pipeline will likely become an irritant in Sino-Russian relations over time, owing to financing difficulties, poor project economics, and the risk of becoming a “stranded asset.”

Russian exports to China via Central Asia pose more complications. Western influence in the region is extremely limited; Central Asia does suffer from natural gas shortages, especially in winter months; and Moscow’s incremental export volumes along this route will be modest. Accordingly, while the West should attempt to bolster indigenous natural gas production in Kazakhstan and Uzbekistan, including by offering technical assistance (and possibly financing), Washington and Brussels should recognize the limits of their regional capabilities.

Finally, the West has an interest in opposing the long-term development of Russian LNG. The United States, Australia, and Canada are democracies that are producing LNG efficiently and much more cleanly than Russia. While the West should strengthen its energy and climate security by swapping out methane-intensive Russian gas for alternative sources, some patience will be required. After Europe’s winter heating season concludes next year, however, Washington and Brussels should begin to pressure Chinese firms to drop support for Russian LNG projects.