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- For Russia, the Power of Siberia 2 pipeline (PoS2) is less about profitability than about securing a strategic export outlet, with its core concerns being price, take-or-pay commitments, possible Chinese financing, and above all the timing of any final contract.
- For China, the immediate benefits of the legally binding memorandum on PoS2 are political, highlighting strong China–Russia ties amid US–China tensions and sending a message to Washington that China may need less US LNG than previously expected.
- Despite uncertainties around PoS2’s timing and utilization, the deal is likely to have major implications for China’s future LNG demand growth, the duration of global oversupply, and Beijing’s bargaining power as its LNG contracts expire.
President Putin’s recent trip to China marks a turning point in the trajectory of Russian pipeline gas flows to the country. During the visit, Gazprom and China National Petroleum Corporation signed a legally binding memorandum[1] to build the 50 billion-cubic-meter (bcm) Power of Siberia 2 (PoS2) and agreed to expand the capacity of both PoS1 and the planned Eastern Route. These developments come against the backdrop of slowing Chinese gas demand and Beijing’s growing energy security concerns related to reliance on LNG. While the key commercial parameters are still to be negotiated, the PoS2 agreement could have major implications for the global LNG market as it enters a major expansion phase. Coupled with the arrival of a sanctioned Russian LNG cargo from the Arctic LNG 2 export project to China, it signals that the two countries are moving to challenge US LNG dominance.
Russia’s Strategic Pivot: High Politics, Weak Economics
For Russia, PoS2 is far more than just another pipeline project. It has become the flagship of Russia’s “pivot to Asia” — a way to demonstrate its ability to redirect its energy flows after losing access to its most lucrative European markets. Domestically, PoS2 is regularly invoked as proof of both Russia’s resilience and its special strategic partnership with China. In other words, it carries heavy political symbolism.
But beyond the rhetoric and symbolism lie significant structural challenges. First, with the pipeline, Russia would be almost entirely reliant on a single buyer — China — giving the latter even greater leverage than it already has. According to the Institute for Energy and Finance (FIEF), a Moscow-based think tank closely connected to Russia’s corporate energy sector and policymaking circles, while the technical and feasibility groundwork for PoS2 is complete, “over the past two years, negotiations on the implementation of this project have been effectively frozen at the initiative of the Chinese side.” If and when the project is built, it will likely be on China’s terms.
Second, the parties involved have not yet reached any Gas Supply Agreements due to wrangling over price, volumes, and supply terms — particularly on “take-or-pay” structures where China seeks to lower the minimum annual offtake from the typical 80 percent to 50 percent. Regarding price, Gazprom CEO Alexei Miller noted in a recent interview only that “the price of gas for China is objectively lower than for Europe due to the shorter transport distance.” But there are signals that China will only greenlight the project if Russia accepts a price close to what domestic Russian consumers pay, which is projected to be around $120 per 1,000 cubic meters ($3.5/million British thermal units) during the 2030s. It would also need to accept a low take-or-pay commitment that increases the risk of the pipeline being underutilized. These conditions would imperil the economic rationale of the high-cost pipeline. But for Moscow, showing that Russia still has a large, long-term export outlet matters more than margins.
Third, there is uncertainty over project financing. Previous Russia–China pipelines have been financed and built solely by Gazprom, but in his interview Miller referred to “issues related to financing the construction of Power of Siberia–2” that remain to be discussed. This may suggest a potential compromise whereby China provides some upfront financing in exchange for lower returns and lower utilization commitments in the future. Such an arrangement would ease the economic burden for Russia and make the project more viable under otherwise challenging commercial conditions.
Adding another layer of complexity, Mongolia — through which the PoS2 route must cross — previously put the project “on pause,” omitting it from its medium-term development plans, though it is now showing hesitant signs of wanting to revive it. This dependency underscores Russia’s limited agency: it must not only negotiate with China but also coax a cautious transit partner into alignment.
In sum, while PoS2 is a strategic necessity for Russia’s energy diplomacy, its realization rests entirely on external decisions.
China’s Calculus: Optics, Leverage, and Flexibility
For Beijing, the immediate benefit of the memorandum is likewise political. The agreement underscores the strong bond between China and Russia, bolstering the argument that Washington is unlikely to be able to orchestrate a “reverse Kissinger” and draw Russia closer to the United States to balance China, and sends a message to the United States that China may need less US LNG than previously expected.
The memorandum also underscores Beijing’s preference for imports of pipeline gas over LNG after recent events that raised questions about the reliability of China’s LNG imports from two of the world’s largest exporters. The US–China trade war 2.0 prompted China’s LNG importers to reduce their direct purchases of US LNG to zero after Beijing put a retaliatory tariff on US LNG in February. The conflict between Iran and Israel this past June highlighted the risk to the 30 percent of China’s LNG imports that pass through the Strait of Hormuz, which Iran’s parliament supported closing in June.
China remains in the driver’s seat regarding the fate of PoS2 as it is Russia’s most viable option for redirecting a portion of the pipeline gas it previously sent to Europe. Beijing is likely to use this leverage to press for concessions on price and volume.
Regarding price levels, China will almost certainly want them to be lower than what it pays for gas delivered through PoS1 because it is arguably in an even stronger negotiating position today than it was in May 2014 when the PoS1 supply agreement was inked. Whereas a decade ago Europe was still buying Russian pipeline gas, now China is Russia’s “buyer of last resort.”
In terms of volume, China will likely want flexibility for at least two reasons. First, if China were to accept delivery of the full 50 bcm, it would be dependent on Russia for 126 to 136 bcm, or about 42 to 45 percent of its projected natural gas imports (pipeline plus estimated LNG) in 2040, up from 23 percent in 2024. China is unlikely to be comfortable with being so reliant on a single supplier, especially since diversification is a hallmark of its approach to supply security. Second, there is some uncertainty about the role natural gas will play in China’s energy transition. For example, renewable energy appears to be constraining the expansion of natural gas in China’s power sector, which accounts for 18 percent of the country’s natural gas consumption. Indeed, in October 2024, Zhang Yaoyu, the global head of LNG and new energies at PetroChina, said that the falling cost of wind and solar has “severely hindered” coal-to-gas switching in China and estimated that renewables have displaced 10 to 13 percent of coal-fired generation.
Global Gas Market Implications
Together, PoS2 and the expansion of the two other pipelines would add 58 bcm of pipeline capacity to China, potentially strongly reducing the country’s future LNG demand. While the additional 8 bcm/y from the two pipeline expansions expected by 2031 will only marginally affect China’s medium-term LNG demand (105 bcm in 2024), it will introduce another bearish factor at a time when around 360 bcm/y of new LNG export capacity is expected to come to market by the early 2030s.
The impact of the pipelines on global LNG markets will depend on whether and how quickly PoS2 ramps up during the 2030s and how fully it is utilized. Even at 50 percent utilization, PoS2 starting in the early 2030s could extend the expected oversupply of the late 2020s — exerting downward pressure on prices, narrowing the LNG supply–demand gap in the 2030s, preventing some LNG projects from taking final investment decision, and limiting uncontracted Qatari LNG capacity from securing additional Chinese deals.
Meanwhile, around 75 bcm/y of Chinese LNG contracts are due to expire in the 2030s. Access to cheap Russian gas would give Chinese companies a powerful bargaining tool, allowing them to extend only the contracts that best align with their needs in terms of volume, pricing, and geopolitics. Australia, Qatar, and portfolio players will be particularly exposed.
These pipeline deals will also increase interregional pipeline trade, which fell significantly after Russia’s invasion of Ukraine, as well as Asia’s exposure to pipeline supplies. While it remains uncertain whether China will replace Europe as the global balancing market — as these pipeline supplies seem likely to remain cheaper than LNG supplies — Chinese companies with large LNG portfolios, including US LNG, will become increasingly powerful at arbitraging between regions.
Conclusion
For both Russia and China, the new memorandum is a symbolic gesture. The final pricing and contractual terms will ultimately reveal the balance of gains: the “take or pay” clauses will shape Russia’s returns and China’s flexibility, while the price will show whose negotiating hand is the strongest. More broadly, the memorandum indicates that the landscape of global energy relations is shifting, with both countries signaling to the US that its LNG may be less needed than anticipated.
[1] A “legally binding memorandum” is an intermediate document between a declarative memorandum of understanding (MoU) and a full-fledged gas supply contract (SPA, GSA, PSA, etc.). Its function is to formalize the political agreement and create certain legal obligations for the parties: to continue negotiations, refrain from exiting the process or seeking alternative partners, and prepare and agree on the final contracts within a defined timeframe. In some cases, it may outline indicative supply volumes, expected project commissioning dates, basic technical parameters of the route, and framework provisions on applicable law or arbitration. However, as a rule, it does not include the most sensitive commercial details—pricing formulas, take-or-pay conditions, annual mandatory volumes, or penalty mechanisms for under-offtake or delays in delivery. These parameters remain subject to subsequent, often very difficult, negotiations.
