Pipeline "Khanfluence": Power of Siberia 2 to Go Through Mongolia to China
Updated: Sep 16, 2020
September 15, 2020
The Power of Siberia pipeline is finally shipping Russian gas to China as of December 2019, after nearly thirty years of discussion. Despite this dilatory timeline, plans for a second Russia-China pipeline, to be completed by 2030, are coalescing. The new project, Power of Siberia 2, would channel up to 50 billion cubic meters of gas from the Yamal Peninsula in the Russian Arctic to eastern China via Mongolia through a 6,000 km (3,728 miles) long pipeline. On August 25, 2020 Gazprom Chairman Alexei Miller signed a Memorandum of Intent with Mongolian Deputy Prime Minister Ukhnaagiin Khurelsukh to establish a company that would execute a feasibility study for the Mongolian portion of the pipeline. The pipeline is likely to be discussed at the Russia-China-Mongolia trilateral meeting that typically occurs at the Shanghai Cooperation Organization summit, postponed until November 2020.
For the past five years, Gazprom and China have talked about the Altai route, which would involve a pipeline from Russia via the mountainous Altai region across the narrow border to western China. While China prefers the security of a direct pipeline with no transit countries, other gas pipelines already flow from Central Asia to western China. Moreover, the greatest demand for gas in China is in its more developed eastern regions.
In November 2014, Gazprom and the China National Oil Corporation signed a Memorandum of Understanding about building a second gas pipeline along the Altai route, but the project later stalled as Russia and China focused on Power of Siberia and Arctic LNG projects.
In the interim, Ulaanbaatar has been lobbying for a trans-Mongolian route--according to Foreign Minister Tsogtbaatar Damdin it took thirty years for Mongolia to earn a seat at the negotiating table with China and Russia to discuss such a pipeline. The opportunity first arose at the 2018 Far East Economic Forum in Vladivostok, where President Khaltmaagiin Battulga outlined his proposal for a trans-Mongolian pipeline. In 2019, Putin backed Mongolia's bid for a trans-Mongolian route while Xi agreed to consider it. The pipeline venture would breathe new life into the Russia-China-Mongolia Economic Corridor, the only trilateral Belt and Road corridor, which has 32 projects on paper but has seen little progress. For Mongolia, the pipeline would bring in transit revenue and also encourage a shift to natural gas to help reduce its tremendous pollution problem stemming from coal power.
In Ulaanbaatar's Suburbs Mongolia's Traditional Ger Homes Are Coal-Heated Photo: Wishnick/Robertson
Kazakhstan also proposed connecting to any new Russia-China gas export project, but in March 2019, Putin officially authorized Gazprom to begin exploring a trans-Mongolian gas pipeline option. In a September 2019 meeting with the Gazprom chairman, Putin requested a feasibility study of a project to pipe Yamal gas to China via Mongolia. According to the Russian president, "the Chinese partners are also inclined to this." Petroleum Economist reported that Putin's intervention was necessary to move the trans-Mongolian option forward, due to internal opposition in Gazprom, which was committed to the Altai option.
For Gazprom, the Altai route would be longer, more expensive and complex to build due to the terrain and fragile environment, but had the advantage of enabling the company to use excess gas from Western Siberia and reduce the need for additional upstream investment to supply the new pipeline. However, Yamal gas also is piped to Europe, and the new route would enable Gazprom to connect its westbound pipeline grid to the Power of Siberia 2. This would put Gazprom within range of acquiring the leverage of a swing producer, which would be able to reorient its gas exports more easily from Europe to Asia.
Unlike the Altai Route, the trans-Mongolian route circumvents the politically volatile Xinjiang Uyghur Autonomous Region (XUAR), as well as the UNESCO World Heritage area in the Altai region. The new route would be even more expensive than the $1 trillion Power of Siberia--estimates on the new pipeline range from $1.3-$1.5 trillion--and would require external investment. Power of Siberia 2 is slated for completion by 2030, though negotiations with China over gas pricing are likely to be lengthy and to delay the project.
Where's the Risk?
China's Risk
According to China National Petroleum Corporation (writing prior to the COVID-19 pandemic), China's gas consumption is likely to double to 15% of China's energy mix by 2050. The company projects gas demand to increase to 650 billion cubic meters per year, which would leave China with a shortfall of 300 billion cubic meters. While these figures may need to be adjusted in the short-term to account for pandemic-related slowdowns, pipeline gas from Russia has its appeal during the present period of tension in China's relations with LNG suppliers such as Australia and the United States. According to a Russian analyst, China still lacks the technology for storing enough LNG to meet seasonal peak demand, making pipeline gas from neighboring countries more appealing.
Chinese analysts are more skeptical of the trans-Mongolian option, which introduces a transit risk for China. Moreover, some Chinese experts highlight the potential security risks involved, especially considering Mongolia's good relations with the United States, and contend that Mongolian democracy is used to legitimate what they see as extremist ultranationalist positions at odds with Chinese policies, such as invitations to the Dalai Lama to visit.
Towering Steel Statue of Genghis Khan near Ulaanbaatar Photo: Wishnick/Robertson
China's Foreign Minister Wang Yi, who just completed a visit to Ulaanbaatar today, was greeted by Mongolian demonstrators opposing China's restriction of Mongolian language instruction in Inner Mongolia. Considering that a trans-Mongolian pipeline would need to traverse Inner Mongolia, the increased attention to threats to language rights there creates a new political risk for both China and Mongolia.
Photo: Agence France-Presse
Global Risk
Risk assessments are distorted by the tendency of each respective country to see the others enjoying closer energy ties than perhaps they have in actuality. For the United States, a second Power of Siberia pipeline would only serve to confirm a consolidating perception of a tightening Sino-Russian strategic partnership. Additional gas supplies would also provide China with alternatives to (already considerably lagging) U.S. LNG imports, which are a part of the trade deal negotiated with the United States.
Meanwhile some Russia experts see Mongolia as excessively dependent on China, increasing the former's risk as a transit country. Former Mongolian Ambassador to Russia Luvsandandar Khangai speaks of the country's future as linked to cooperation with both Russia and China, but Jargalsaikhan Dambadarjaa, a political observer and columnist, fears that Sino-Russian cooperation may not be longlasting, potentially leaving Mongolia with an unusable pipeline as well as a damaged environment.