The real aim of Gazprom’s new Siberian gas pipeline? To get China on board as a major energy customer for Russia

Gas prices have plunged since 2014 when China and Russia agreed to the Power of Siberia gas pipeline project, making it borderline profitable at best. However, it has opened the door to Chinese investment in bigger energy projects in Russia

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A Gazprom employee surveys the Power Of Siberia gas pipeline at the Atamanskaya compressor station in Russia’s Amur region on November 29. Photo: Reuters

Published: 10:30pm, 16 Feb 2020Updated: 10:30pm, 16 Feb 2020

Loss leader pricing involves selling a product below cost to get customers through the door to buy other highly profitable items. Walmart, Toys ‘R’ Us, Gillette and Nespresso have successfully deployed this strategy. Now, to this list, one can add Russian state-owned Gazprom.

Gazprom’s US$55 billion Power of Siberia gas pipeline is its largest and most expensive project, and costs are estimated to take 10-15 years to recover. But with oil prices – to which gas prices are indexed – about 40 per cent lower than in 2014 when the deal was concluded, the pipeline can only be either borderline profitable or an outright loss.

The gas pipeline was meant to help Gazprom fend off rival Russian gas producers that have chipped away at its domestic market share. Coupled with demand declines in post-Soviet states and flat demand in Europe, Gazprom had excess gas to sell to China.

However, the excess gas is in its west Siberian fields, whereas the pipeline is filled by new fields in east Siberia. Ironically, it may open up opportunities for Gazprom’s competitor, Rosneft, which owns gas fields in east Siberia that can supply later phases more economically than Gazprom can.

Rosneft also has vast experience in China, having played a big role in Russia becoming China’s largest oil supplier since 2016.

The Power of Siberia is often regarded as a blowback against sanctions imposed by Europe and the United States following Russia’s annexation of Ukraine, a way for Russia to play off Europe’s gas demand against China’s, and a reminder that China, a major market for US liquefied natural gas, has alternatives.