By Genevieve Donnellon-May

Cut off from Europe after its invasion of Ukraine, Russia is “pivoting to Asia”, and especially to China, to find alternative markets for natural gas. Moscow wants a larger share of China’s energy mix in the future, raising concerns that could mean reduced exports for Australia and other countries.

In particular, Moscow wants to build a second pipeline to pump natural gas to China. Russia’s Power of Siberia-1(PS-1) exports gas from eastern Siberia to China. The new Power of Siberia-2 (PS-2) pipeline – assuming it is eventually built – will export gas from the Yamal peninsula fields in western Siberia, cutting across eastern Mongolia to annually carry 50 billion cubic metres (bcm) of gas to northern China. Currently, the country is the world's biggest energy consumer and a growing gas consumer.

The PS-2’s projected yearly export quantity is similar to the 55 bcm capacity of the damaged Nord Stream 1 pipeline to Germany.

Construction of the proposed pipeline is expected to begin construction in 2024, with Gazprom wanting to start delivering gas by 2030. 

The proposed PS-2 holds numerous benefits for China. Aside from supporting Beijing’s national climate goals and policies, despite availability and cost of gas having been limiting factors in the past, the pipeline would improve China’s energy security. The Chinese central government wants to diversify energy sources, including in part to avoid supplies being choked off in transit from the Middle East in a crisis – the so-called ‘Malacca dilemma’ – or other vulnerabilities to its imports.

Although China is a major natural gas importer, most of China’s energy consumption is from coal (59%), including domestic sources, followed by petroleum (20%), primary electricity (hydropower, wind, solar, and nuclear), and biomass (3%). In contrast, natural gas accounts for around 8.4% of China’s total energy consumption, used in industry, residential and transport purposes, and power generation.

By 2030, however, Beijing expects natural gas to account for 15% of the country’s energy mix. Although natural gas is only a small part of China’s energy consumption, domestic production is unable to keep up with demand, due in part to geological issues making extraction difficult.

Currently, China’s foreign natural gas supplies are imported via land pipelines (the Central Asia pipeline; China-Myanmar pipeline; and PS-1) and by sea as liquified natural gas (LNG). Between 2011 and 2021, the country’s natural gas imports skyrocketed four-fold.

According to the China Natural Gas Development Report, in 2022, the country’s total natural gas consumption was 364.6 bcm, of which around 41% was imported, including from countries like Turkmenistan, Australia, Russia, Qatar, and Malaysia.

As others note, the proposed PS-2 pipeline fits into the broader context of strengthening Sino-Russian bilateral trade and bilateral energy cooperation, including nuclear power development, natural gas agreements, coal sales, and joint projects.  

Still, getting the project up and running won’t be easy. Russia hasn’t yet been able to get China to commit irrevocably to the project: Beijing might have a weather eye on Western reactions.

Negotiations could stretch on. There is some uncertainty about China’s future gas demand and Beijing’s domestic production and self-sufficiency aims. And China is quite willing to delay talks where it sees negotiating advantage in doing so. Even if approved, China will drive a hard bargain. The pipeline could take years to build and key details (like gas prices, terms of the gas deliveries, and financing) must also be determined. Even then, the maximum export capacity of the cross-border pipelines could still be much less than the pipelines connecting Russia to European markets.

Due to concerns about the long-term trajectory of Russian foreign policy, Beijing is unlikely to finance the project up-front. And China will remain wary of attempts by Moscow to weaponise energy supplies against Beijing as well (over) reliance) on Russia.

The proposed project has a number of implications for the West, including Australia, too. As noted above, Russia’s interest in the deal reflects its need to pivot to Asia. If the pipeline proceeds, it will be another significant deal tying Russia and China closer together, reinforcing their “no limits” partnership. Furthermore, it supports the interests of both countries in reducing reliance on the West – an example of China and Russia undertaking their own “de-risking”.  

Could this affect Australia’s LNG exports? In theory, more Russian gas could lead to less Australian gas exports.

China plays a central role in regional and global gas markets. In 2021, the country imported more LNG than the rest of the world in 2021, accounting for almost 60% of global LNG demand growth.

More than 90% of Australia’s LNG exports are exported to China along with Japan, South Korea, and Taiwan. And Australia is their biggest LNG supplier too, accounting for 43% of Japan’s imports, 37% of Taiwan’s, 35% of China’s, and 25% of South Korea’s.

Still, many factors will bear on the ultimate demand story.  These include the pace at which China transitions to clean energy sources and the role LNG plays as a transitional energy source over that period.

The extent to which demand in southern China offsets Russian gas going to industrial northern China should also be considered. Southern China, rather than northern China, consumes the majority of LNG imports. As the pipeline route is expected to end in the country’s northern region, China’s natural gas demand, including LNG imports, in southern China may still remain strong.

In all scenarios, diversification of Australian LNG export markets is a sensible approach. Softer Chinese demand for Australian LNG could mean more supplies available for other countries. However, it could also leave Canberra scrambling to find alternative markets. As the past few years have shown, undertaking a diversification export strategy at short notice has its own challenges.

This article originally appeared in The Interpreter.