Russia-China Gas Deal May Seal New Gas World Order
The signing of the Power of Siberia 2 pipeline deal by the presidents of Russia and China was perhaps the biggest news to come out of the two leaders’ meeting earlier this month. It was also the deal that may very well make the new global natural gas flow order permanent, potentially interfering with President Trump’s energy dominance ambitions.
The Power of Siberia 2 project has been in the works for years. Yet China took its time deciding to commit to it. Now, the decision has been made, and although details have yet to be tailored, the signal is clear: China will be sourcing more natural gas from Russia—a lot more. The annual amount of gas Russia will be selling to China once the second Power of Siberia is completed would exceed 100 billion cu m.
Incidentally, this is a similar amount to that which Russia was supposed to be sending to Europe after the completion of the second branch of the Nord Stream pipeline. This will not be happening now, not with the EU leaders pledging to suspend all imports of Russian energy within two years, even as they keep buying Russian gas from TurkStream and step up LNG imports from the most sanctioned country in the world. This will have to stop if the EU is serious about ending all Russian energy imports.
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As luck and geopolitics would have it, the EU has a ready and willing alternative supplier. U.S. gas producers have been on a roll, boosting production for the liquefaction plants along the Gulf Coast, eyeing the European market as a long-term demand source. The Trump administration has been encouraging this as part of its energy dominance agenda. For both, the Russia-China pipeline deal is a problem. It is, however, a bigger problem for the European Union.
European businesses have a competition problem. It stems from high energy costs that drive up final prices for things produced in Europe. China, on the other hand, has lower energy costs that boost the competitiveness of Chinese-made products. There is also the innovation issue, but that’s a different topic. So, China enjoys low-cost energy to enhance the competitiveness of its products on international markets, while Europe struggles with the impact of high-cost energy on its competitiveness. Now, the struggle is about to become chronic.
Europe is already the largest market for U.S. liquefied natural gas. This is good in terms of supply security but not so good in terms of price. As has been repeated ad nauseam, there is no way in the physical world we inhabit for U.S. LNG to become cheaper for European buyers than Russian—or indeed Norwegian—pipeline gas for obvious reasons related to geography and the production costs of gas liquefaction. This automatically puts LNG-dependent Europe at a disadvantage compared to China, an even greater one than it is already facing.
The situation is somewhat problematic for the Trump administration as well, because the energy cost troubles of European businesses will eventually begin to affect their purchasing power—and the purchasing power of the governments responsible for securing energy supplies for, say, the heating season. This is not good for governments planning to dedicate billions in subsidies to specific industries and financial aid to households unable to afford current energy prices. Essentially, there is not enough money to cover all the expenses in Europe.
From the U.S. perspective, the Power of Siberia 2 deal is also bad news because it means China would be importing less LNG, including U.S. LNG, as Reuters’ Ron Bousso pointed out in a recent column. Yet China has not imported U.S. LNG for months. It stopped importing U.S. LNG in early spring, amid the tariff spat between Washington and Beijing. Meanwhile, U.S. LNG exports hit an all-time high last month, suggesting producers don’t really need the Chinese market all that vitally.
The future may, on the face of it, seem uncertain for both U.S. LNG producers and European buyers. The latter’s governments have insisted they want to reduce and eventually phase out the consumption of all hydrocarbons. This, however, would take decades, if it ever happens. The reality of energy has helped motivate the surge in new U.S. LNG capacity expected to come online over the next few years. However, there are limits to how much new export capacity can be built—because demand for gas is on the rise in the U.S. itself as well.
With the boom in data center construction, domestic demand in the U.S. is rising for the first time in over a decade. As soon as this pushes prices high enough, more gas will be going into the domestic market, making LNG even more expensive for European buyers. Perhaps it’s time Europe’s leadership started looking into pipeline gas alternatives, from, say, Central Asia.
