“A Geopolitical Gas Venture”

The Monocle magazine (No. 37 (1402). 2005. Pp. 21-23) published an interview “A Geopolitical Gas Venture” with Alexey Belogoryev, Research and Development Director of the Institute for Energy and Finance, about the past and future of the Power of Siberia 2 gas project.

— What is the status of the document signed by Gazprom and CNPC in Beijing? What does “legally binding memorandum” mean? Is this not yet a construction agreement or a supply contract?

— In Latin, memorandum means “something to remember,” and it usually describes only framework agreements and general intentions of the parties. However, nothing prevents them from adding clauses to it that contain certain obligations to create legal (contractual) relations in the future. But this is not a contract yet and we are talking about preliminary agreements that can be revised. Unfortunately, the text of the memorandum has not been made public and, apparently, will not be, so we do not know what exactly the obligations are. It is still a black box, and there are many more questions than answers.

— Why is the document not trilateral, without Mongolia's signature?

— This is not an intergovernmental agreement, but an agreement between two commercial companies of a strategic nature. Mongolia does not plan to invest its own money in the project, acts as a gas transit country and may buy part of the supplies (within three to five billion cubic meters per year) if it engages in gasification, as planned. Its role is important, but still secondary.

— Has the price of gas supplies via Power of Siberia 2 been agreed upon or not?

— Whether the memorandum contains a clearly defined pricing formula is one of its main mysteries. Frankly, I doubt it. But this should not be a fixed value, but almost certainly a link to some market benchmark. But it is not clear to which one exactly: the price of oil, oil products, coal or gas indices - there are many options. A combination of them is also possible. Predicting which of the numerous pricing options will be beneficial to both parties thirty years in advance (and taking into account the construction, almost forty years) is a very non-trivial task. Especially given the price volatility of recent years.

- Can we say with certainty that the project will still take place?

- The signed memorandum is far from the first such document in the history of this project, but, in my opinion, this is still an important step forward, since China for the first time after several years of silence has clearly indicated its real interest in the project.

This is undoubtedly facilitated by the geopolitical context of the growing confrontation with the United States, which has forced the country's leadership to reassess the risks. China has reason to fear both future US sanctions and direct threats to the security of its sea communications. Both are critical for LNG supplies, but do not affect pipeline imports from Russia and Central Asia. In other words, China is creating a rear energy supply system for itself in case of future geopolitical cataclysms.

But the fact that the project is based on geopolitical considerations is also its main weakness. Since it is still unclear whether China will need such a volume of additional gas imports (45-50 billion cubic meters per year), especially over thirty years. And, accordingly, it is unclear whether CNPC is ready to guarantee the annual loading of the gas pipeline's design capacity. And its profitability and return on investment depend on this.

— What are the key benefits of the Power of Siberia 2 project for Russia, China and Mongolia?

— China receives a new, reliable source of relatively inexpensive gas supplies, almost independent of geopolitical upheavals. In addition, it ties Russia to itself even more economically.

Mongolia is increasing its strategic role by becoming a major transit country for energy resources. It will also benefit economically from the construction itself and transit payments. It is also important that the gas pipeline allows for the gasification launch of Mongolia itself, which is significant, for example, from the point of view of meeting its climate goals.

Russia's benefits are the most controversial and depend on detailed agreements that are unknown. What will be the annual volume of guaranteed demand (on a "take or pay" basis), what will be the price of gas, who will finance the construction and under what conditions? The risk remains the same - this is a clearly expressed monopsony.

Answering your question, the opening and development of a new export direction is, in general, of course, a success. Another thing is that the overall, long-term profitability of this direction causes a lot of controversy, largely due to the lack of transparency of data, typical for Gazprom.