Energy Musings - September 11, 2025
Here is a quick review of the Power of Siberia 2 pipeline deal between China and Russia and its potential impact on the global natural gas market.
Power of Siberia 2 – A Game Changer Or Head Fake?
In many sports, the player advancing the ball seeks to pass a defender by using a head fake – act like you’re going in one direction but then go elsewhere. During the recent Shanghai Cooperation Organization meeting in Beijing, China, Russia and China announced the signing of a “legally binding” agreement to construct the Power of Siberia 2 pipeline, which will transport natural gas from Russia’s Siberian fields to Eastern China, passing through Mongolia.
The media and experts declared this a “game-changer” in geopolitics. It was viewed as a tightening of the economic alignment between China and Russia, as well as strengthening their defiance toward Europe and the United States. Some experts thought it was a message to counter the “energy supremacy” policy of the United States.
The pipeline was part of a multi-pipeline project conceived by Russia and discussed with China’s leaders, beginning in 2006. At the time, China was in the midst of a significant economic growth spurt, which had it consuming vast amounts of materials and energy supplies. Russia’s energy resources were extensive, but its oil and gas companies struggled to develop them due to a lack of advanced oilfield technology.
An alternative strategy involved inviting Western oil and gas companies, which possessed the resources and expertise to develop liquefied natural gas (LNG) export terminals. Russia’s economy was and remains heavily dependent on the development and sale of its vast natural resources.
Unsurprisingly, Russia became a significant supplier of oil and natural gas to European countries seeking to transition away from relying on their coal, lignite, and peat fuels. They understood that natural gas was a cleaner fuel than the ones they were using, which fit with the growing pressure to transition their energy system to cleaner fuels in response to climate change fears. In March 2011, the Fukushima Daiichi nuclear accident in Japan prompted German Chancellor Angela Merkel to accelerate the shutdown of Germany's remaining nuclear power plants.
Russia’s shipments of natural gas to Europe grew steadily. With prospects of even greater demand in the future, Russia proposed building new pipelines to Germany. Germany backed the construction of Nord Stream 2, a gas pipeline under the Baltic Sea from Russia to Germany, designed to significantly boost supplies. The pipeline later became the focal point of the geopolitical battle between Europe and Russia following the latter’s attacks on Ukraine, beginning with the takeover of Crimea and in February 2022, the invasion of Ukraine. The pipeline’s destruction was a mystery, and it has not been fully repaired to date.
Even after the Crimea takeover during the Obama presidency, Russian gas flows into Europe grew steadily until 2020, and the global economic shutdown due to COVID. Gas volumes slumped further due to the weak economic recovery in Europe and a warm winter. Then came the 2022 invasion of Ukraine and the decision to cut off Russian gas flows to curb revenues supporting the invader’s war efforts.
The dramatic decline in Russian natural gas flows into Europe.
To understand the significance of Russia’s gas for Europe’s energy supply, a chart of gas sources between 2020 and 2024 illustrates how they have shifted due to sanctions and political pressure aimed at punishing the Russian economy. This reflects the changing market dynamics. The various shades of red indicate the significant Russian gas flows into Europe during 2020-2022. Note how dramatically that flow has shrunk in the past two years. Europe is now wrestling with its next steps in punishing Russia.
The Ukraine invasion forced the EU to cut Russian gas use.
The European Union continues to make progress in reducing its dependency on Russian natural gas. EU quarterly data, as reported by Bruegel, shows Russia’s flows have fallen to 65% of the most recent peak deliveries in 4Q2024. That peak was significantly below the volumes shipped during 2021 and 2022. While that is significant progress, the debate in Europe currently centers on whether to impose additional sanctions on Russian oil and gas, including LNG, under pressure from the U.S. It is also tied to the debate about EU secondary sanctions being imposed on India and China, the two primary buyers of Russian oil and gas, and supporting Russia’s war efforts.
The European Union is reducing its dependency on Russian gas supplies.
The sanctions debate in Europe is challenging because the continent’s political landscape is in tatters, and the cost of gas supplies from the U.S. and other markets is more expensive than the Russian gas being purchased now. The higher cost is contributing to the deindustrialization of European economies, as governments struggle to support their welfare states and the costly transition to renewable energy.
Superimposed on the discussion is the cost of supporting Ukraine in the ongoing war with Russia. Will the U.S. pull back its support and willingness to add more sanctions on Russia, as well as institute secondary sanctions on India and China, if Europe doesn’t step forward? How does this play out, given the recent shooting down of Russian drones deep in Poland, in what appears to be an escalation of the war by Russia?
So, was the Power of Siberia 2 announcement a head fake or a serious move? The announcement lacked details about two critical points – price and timeline. When the Power of Siberia 1 was negotiated, it was two years after the project began that pricing terms were negotiated, and the pipeline could be financed. Construction commenced nearly five years after discussions about the project started.
Annette Bohr, associate fellow in the Russia and Eurasia program at Chatham House in London, told the Associated Press that the announcement was “an absolutely perfect way…to say: Look, we’re not all talk, here’s an actual measure.” The negotiations have progressed slowly because China is seeking low prices. “China is definitely in the driver’s seat” for energy deals, according to Bohr.
The following chart shows the Russian gas pipeline network, with #13 being the proposed Power of Siberia 2 pipeline.
Russia has an extensive natural gas pipeline network to boost its economy.
Equally important are the details from a comparison of the various pipeline projects that can deliver more Russian gas to China. Note that the Power of Siberia 2 pipeline’s transmission cost is estimated to be the lowest of the four possible projects, plus it would deliver the largest volume of gas. The offset is that it has the longest construction time. That would seem to favor it over the others, given China’s interest in keeping its energy costs low.
Power of Siberia 2 is a less costly gas supply option for China.
Could the construction of Power of Siberia 2 upend the global LNG market? It is possible, but only because we don’t know China’s future energy demands and supply plans. China continues to build massive amounts of coal-powered electricity-generating capacity, while it also installs huge numbers of solar panels and wind turbines. At the same time, China is producing one million barrels of oil a day from coal, which has global oil markets struggling to understand China’s oil demand profile.
Our take on the Power of Siberia 2 pipeline announcement is that it was a head fake that rewarded Russia with a political win. It was a strategic move for China to demonstrate its willingness to strengthen its political ties with Russia, as it faces tougher trade negotiations with the U.S. Because it may take years to negotiate a contract, the pipeline is unlikely to disrupt the global gas market anytime soon. We would watch for news of a gas contract to underwrite Power of Siberia 2 before estimating when its supply would cause disruptions with the global gas market.