Gazprom forges ahead with long-delayed China pipeline

Russian energy giant Gazprom is pushing ahead with plans for a new gas pipeline to China, drawing up costly detailed designs in a sign Moscow believes the long-delayed project is back on track.

The Power of Siberia 2 (PS2), which would carry 50bn cubic metres of gas a year, is Russia’s only real hope of offsetting part of its lost exports to Europe.

Russia and China first signed an agreement on PS2 in 2014, but it stalled for years before gaining urgency after Russian President Vladimir Putin’s full-scale invasion of Ukraine in 2022.

In September, Putin and Chinese President Xi Jinping signed a “memorandum of construction”. After that Gazprom’s engineers began work on the technical designs, three people familiar with the preparations told the Financial Times.

The engineers were likely carrying out the front-end engineering design stage, which involves producing “hundreds of volumes” of technical documentation, said Sergey Vakulenko, a senior fellow at the Carnegie Endowment for International Peace and a former head of strategy at Gazprom Neft, Gazprom’s oil division.

Carrying out such studies was expensive and, according to Vakulenko, could amount to 5 per cent of the total cost for a project of this scale. A senior Russian energy executive told the FT that the cost might be up to 10 per cent of the overall expense.

“Such spending is unusual, unless there is a strong belief that the money is being well spent and that the investment is safe,” the executive said, referring to the design stage.

The total budget of the project is undisclosed. Vakulenko and Ronald Smith, founder of Emerging Markets Oil and Gas Consulting Partners, and a longtime Russia energy market analyst, estimate the upper limit at more than $30bn, but both note that the final figure could be lower. Other reports have suggested a far smaller sum.

Chinese officials have made few public comments about the pipeline despite Xi signing the latest memorandum, leading some observers to doubt it is really moving forward.

It is still far from guaranteed. One reason for Gazprom’s continued push, a Russian energy consultant said, was that the company had project divisions that “either need to be shut down or given something to work on”. “And what else is there?” he asked.

Gazprom clearly believed China would come around eventually, he said. “It’ll still be the cheapest gas for them [the Chinese] — that’s why Gazprom is willing to invest serious money, and I don’t think they’re terribly wrong.”

Gazprom did not reply to a request for comment.

Analysts at S&P Global Energy say deliveries to China via the pipeline would likely start in the early 2030s.

Russia has drawn up documents for various sections of the pipeline over the project’s long history. But the new designs will be the first comprehensive engineering study for the entire line. The project is expected to stretch 6,700km, running for 2,700km through Russia starting from the country’s northern Yamal gasfields, and about 1,000km through Mongolia and ending in China.

Gazprom chief executive Alexei Miller confirmed the beginning of work on a small 410km stretch of the pipeline in Siberia, which Moscow has decided to build regardless of China’s decision, as part of domestic efforts to improve regional gas supply.

“Gazprom is building pieces of what may eventually become part of PS2 if it goes ahead, but will serve local markets if it isn’t,” said Smith.

Miller met in September with the head of Russia’s key pipe manufacturer, United Metallurgical Company, to discuss “pipe deliveries for major investment projects”.

The new work does not mean, however, that a PS2 deal has been reached on crucial terms such as price and supply conditions.

Those issues have been persistent stumbling blocks, but the pipeline increasingly represents a crucial lifeline for Gazprom and the Russian government.

The Yamal fields, where the PS2 begins, used to supply Europe, and the new pipeline is their only chance to compensate for the loss in revenue. But even if PS2 were launched, Russia’s total pipeline exports to China would still amount to only about half of its pipeline gas supplies to Europe before the full-scale war.

Russia’s annual gas sales to Europe fell to 51.7bn cubic metres in 2024, about a third of prewar levels, with a further decline expected this year.

China is in no hurry to build the pipeline. Russia supplies Beijing via the much shorter Power of Siberia pipeline, which came online in 2019. The two sides agreed in September to raise deliveries from 38bn cubic metres of gas a year to 44bn cubic metres.

It is unclear how Gazprom intends to finance the project. After recording its first loss in 25 years in 2023, the state-owned company’s net profit recovered to Rbs1.3tn last year, but Gazprom’s debt is more than four times that figure, totalling Rbs5.7tn ($71bn).

China has been preparing its bond market to open the door to Russian energy companies. In September, Chinese rating agency CSCI Pengyuan granted Gazprom, along with other Russian energy majors, a triple A rating, paving the way for them to issue debt.

Still, Beijing’s approach has been cautious. When Russian media exploded with reports of a “historic deal” on PS2 in September, the agreement was barely mentioned in Chinese outlets.