China as Russia’s First Alternative Route in Natural Gas Exports

CHINA AS RUSSIA’S FIRST ALTERNATIVE ROUTE IN NATURAL GAS EXPORTS After the European sanctions and the decision to give up Russian natural gas in response to Russia's invasion of Ukraine in the past days, Moscow has started to look for alternative markets instead of the European market. Considering that Russia did not cut off gas flow to Europe even during the Cold War period, it is a harbinger of the seriousness of the energy crisis between Russia and Europe. In fact, the crisis between Russia and Europe started with the illegal annexation of Crimea by Russia in 2014, and Moscow has sought alternative markets, especially energy, since that date. In this context, China, Russia’s eastern neighbor and one of the world’s largest economies, stands out. While Beijing, which is dependent on coal and in need of energy, tries to secure longterm access to Russia’s natural gas, Putin is directing the country’s economy eastward in order to avoid isolation and create a strong alternative market after the Ukraine crisis and Western sanctions.

Today, China imports natural gas through liquefied natural gas (LNG) and pipelines. These imports accounted for 46% of the country’s total gas supply in 2021, up from 15% in 2010. Last year, natural gas pipeline imports met 16% of China’s natural gas needs, while LNG imports accounted for 30%. In 2021, China’s domestic production reached about 54% of the total natural gas supply. While China imports natural gas via pipeline from five countries, such as Turkmenistan, Russia, Kazakhstan, Uzbekistan and Myanmar, it also imports LNG from 25 countries. The six largest LNG suppliers are Australia, the United States of America, Qatar, Malaysia, Indonesia and Russia, which collectively provide 85% of LNG imports. China’s gas imports and production have increased as government policies encourage the transition from coal to natural gas to reduce air pollution and meet emissions targets. The natural gas agreement worth US$400 billion signed by the President of Russia, Vladimir Putin and the President of China, Xi Jinping in November 2014, is of great importance for Russia, which follows the strategy of turning its face to Asia due to the sanctions. The “Power of Siberia” pipeline is the biggest contract built by the stateowned gas producer Gazprom, for transferring gas from Russia’s Far East to China’s northeast, is the largest gas transportation system with an annual transport capacity of 38 billion cubic meters (bcm).

The Power of Siberia pipeline, also known as the “China-Russia East Route Natural Gas Pipeline”, which started its first shipment in December 2019, carries natural gas from Yakutia to Primorsk and from there to China. According to Gazprom’s statement, approximately 4.1 bcm were delivered through the pipeline in 2020 and it is aimed to reach 38 bcm, its full capacity, by 2025. Once the pipeline reaches its full capacity of 38 bcm by 2025, it is highly likely that natural gas will completely replace coal in China’s northeast region in the long run. In this context, while China will end the use of coal in the northeast region, Russia will be able to close the gap in the European market. In 2021, Russia exported 16.5 bcm of natural gas to China via pipeline and through LNG, while Russian gas producer Gazprom announced that natural gas exports to China increased by 60% in the first four months of 2022 compared to the same period in 2021.

Based on this, when we compare Russia’s natural gas exports to China with European exports, Europe continues to be Russia’s largest customer by far, importing approximately 200 bcm of gas every year, accounting for 30% of the continent’s approximate supply. Therefore, even when China uses the full capacity of the pipeline, it can transfer up to 38 bcm of natural gas per year. Accordingly, Russia’s natural gas transfer to China will not be sufficient to replace the European market exported by Russia. That’s why Russia is creating alternative projects such as “Power of Siberia 2” and “Soyuz Vostok” pipelines to increase its natural gas transport volumes to China.

In this case, Russia agreeing to a 30-year contract to supply gas to China through Power of Siberia 2, a new 2600 km pipeline from the Bovanenkovo and Kharasavey gas fields in Yamal, supported Moscow’s strained relations with the West over the Ukraine crisis with an energy alliance with Beijing. Before the invasion, President Vladimir Putin signed an estimated US$117.5 billion oil and gas deal with Chinese President Xi Jinping in February 2022. This included Gazprom’s supply of 10 bcm of gas per year to China through a new pipeline– Power of Siberia 2 - that would run from the Russian Far East island of Sakhalin to the northeastern Chinese province of Heilongjiang. According to the statements of Gazprom, considering the contract signed in February, gas shipments to China via Russia’s Far East routes could reach 48 bcm per year. The new pipeline is expected to be operational by 2026 and means that together with the existing pipeline, annual natural gas supply could increase from around 10 bcm in 2021 to 48 bcm. Gazprom is also working on plans for another pipeline, the Soyuz-Vostok, which will run from Russia to China via Mongolia, meaning an additional 50 bcm of gas pipelines can be transported to China each year. The idea of a Trans-Mongolian gas pipeline is not new and was reintroduced by Mongolia at the 2018 Eastern Economic Forum. In 2019, with the tacit approval of Beijing, Gazprom and state-owned Erdenes Mongol initiated a feasibility study on the SoyuzVostok pipeline, the Mongolian leg of Power of Siberia 2. In early 2022, the Mongolian authorities and Gazprom approved the Soyuz-Vostok feasibility study, along with the general feasibility study of Power of Siberia 2. A few days after the start of the Russian invasion of Ukraine, Erdenes Mongol and Gazprom quickly signed an agreement for the engineering and design of the pipeline with the aim of starting construction in 2024. With a capacity comparable to the suspended Nord Stream 2 project, Soyuz-Vostok is well positioned to bring gas to China from Russia’s Yamal peninsula, originally intended for European markets. As a result, it is understood that Russia has started to turn its face towards China since 2014 against European sanctions. The invasion of Crimea led to the emergence of the Power of Siberia pipeline, while the invasion of Ukraine led to the emergence of the Power of Siberia 2 and Soyuz-Vostok pipelines.Events such as Moscow's signing of a large amount of energy agreements with China before the invasion of Ukraine and its meeting with Mongolia after the invasion and the acceleration of the feasibility studies of the Soyuz-Vostok pipeline are concrete indications that Russia is targeting the Chinese market. In this context, it is possible to see that Russia is turning to a large market with energy needs such as China against European sanctions; while on the other hand, it is possible to observe that China, which meets its energy needs and wants to get rid of coal, is also in favor with the recent development.

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