Announcements about progress in talks over the Power of Siberia 2 gas pipeline made during the September visit of a Russian delegation to China were entirely predictable. After all, there are major benefits for both sides of Power of Siberia 2, which would pump Russian gas to China. Not only does China require more gas, it also needs multiple suppliers in case of a geopolitical crisis. Russia has huge quantities of gas, and is seeking to replace the European market it lost following the full-scale invasion of Ukraine. However, political and transactional considerations have long meant a final agreement has proved elusive.
For Moscow, China is the only buyer capable of taking the huge quantity of gas it has available, and not just because Russia has lost the European market. Russia’s Yamal Peninsula gas reserves were too large to be absorbed by European customers even when Russian-European gas trade was in full swing before the full-scale war with Ukraine. For this reason, state-owned Gazprom has long sought a way to export Yamal gas to China. Low upstream costs mean it could still be a profitable trade, despite the long distances to the Chinese market.
Although building a pipeline from Yamal to China would be a major—and expensive—undertaking, it would not be unique. The distance from Yamal to Kyakhta on the Mongolian border is about the same distance from Yamal to the Ukrainian border, and the length of the transit pipeline in Mongolia (935 kilometers) is about the same as the Ukrainian transit route. Even if it costs about $100 per thousand cubic meters to pump gas from Yamal to the China-Mongolia border, Russian gas would still be cheaper for Chinese buyers than the alternatives.
China currently consumes just over 400 billion cubic meters of gas per year. About 60 percent of that is produced domestically, while the remaining 40 percent is imported. About half the imported gas comes via pipelines—mostly from Russia and Turkmenistan—while the rest is liquefied natural gas (LNG).
China’s demand for gas will be fueled by growth in the power, utilities, and transportation segments. China is a leader in renewable energy, but demand for electric power is forecasted to grow even faster. Gas makes up only a relatively small proportion of the energy China consumes. However, replacing coal with gas in electricity production cuts carbon dioxide emissions per kWh in half, and reduces air pollution (which is a priority for Beijing). China is also switching its trucks to run on LNG in order to reduce oil imports and reduce CO2 emissions.
Researchers from CNPC, China’s biggest energy company, forecast the country’s annual demand for gas will rise to 600-670 billion cubic meters by 2040. They also predict that China’s gas production will peak at about 310 billion cubic meters somewhere between 2035 and 2040. In other words, by the second half of the 2030s, China’s gas imports will grow from the current 180 billion cubic meters to between 290 and 390 billion cubic meters.
Right now, about a third of China’s LNG imports come from Qatar, a third from Australia, 10 percent each from Russia and Malaysia, and the remaining 15 percent from other exporters. While LNG production in Russia and Qatar will either remain at current levels or grow, production in Malaysia and Australia looks set to fall. There might be additional large, yet-to-come-online LNG projects in Mozambique and Tanzania to tap, but they would not be sufficient to meet China’s import needs.
Global LNG production capacity is expected to grow by almost 300 billion cubic meters a year by 2030. However, the growth will be spread unevenly across the world: about half the new capacity will come from the United States, 20 percent from Qatar, and 10 percent from Canada. China can hardly count on the United States to supply it with LNG. Relations between the two countries are strained because of growing tensions over Taiwan, and because Washington sees Beijing as a military, political, and economic threat.
In 2021, the United States and Qatar vied for the ranking of the second-biggest exporter of LNG to China after Australia. But by 2024, the United States had fallen to fourth place, with just a 5 percent share of China’s LNG imports. The last LNG carrier headed for China left the United States in November 2024, and there have been no new cargoes since then. A similar cessation of purchases happened in 2019, when President Donald Trump launched a trade war with China during his first term. That dispute ended with an agreement, and LNG purchases restarted. The current standoff is likely to be more serious and last longer. China has a growing awareness of its negotiating strength vis-à-vis the United States.
In recent years, China has increasingly opted for geopolitical gestures that underline its strength, independence, and capacity to withstand U.S. pressure. And Beijing's decision in 2025 to accept LNG cargoes from the sanctioned Russian project Arctic LNG 2 should be understood in this context.
Pipeline gas from Russia and Central Asia has one major advantage over imported LNG for China: it is less vulnerable to geopolitical vicissitudes. If tensions with the West were to escalate, LNG deliveries to China could be a pressure point. Cargoes from Qatar and African countries pass through both the Strait of Malacca and the Taiwan Strait. While cargoes from Malaysia, Indonesia, and Australia avoid the Strait of Malacca, they still have to pass through the Taiwan Strait. The fact that almost all major international LNG projects involve companies headquartered in the United States or other NATO countries is also a problem for Beijing.
While China needs gas, and Russia has huge gas reserves, there is still a major stumbling block: Beijing’s informal policy is that no single exporter of critical natural resources should enjoy an excessively large slice of the Chinese market. And it’s true that current gas supplies from Russia to China make Russia’s market share look significant. For now, pipeline deliveries from Russia stand at 38 billion cubic meters of gas per year, but they are poised to grow to 56 billion cubic meters (including up to 44 billion cubic meters via the Power of Siberia 1 pipeline, and as much as 12 billion cubic meters from gas production on Sakhalin). In addition to that, of course, China also receives large quantities of Russian LNG.
At first glance, this would appear to make Russia an overly dominant player on China’s gas market. However, it’s easy to exaggerate Beijing’s sensitivity on this issue. If exports of Russian pipeline gas reach the volumes promised in recent statements about Power of Siberia 2, Russia’s share of China’s growing import portfolio will be 27–36 percent. Russia would account for 16–17.6 percent of China’s total gas consumption. Those are significant numbers—but not excessively so.
When it comes to the fundamentals, it looks like the stars should align for Power of Siberia 2. But it’s not all about the fundamentals. There are also political and transactional considerations. For Russia, the breakeven price at the Chinese border is about $125 per thousand cubic meters. For China, the alternative to Russian pipeline gas is LNG, which currently costs an average of $370 per thousand cubic meters. That leaves a wide margin for negotiation.
Russian negotiators are well aware that they agreed to far less profitable terms than those enjoyed by other Chinese suppliers when they signed the Power of Siberia 1 contract. Turkmenistan, for example, sells gas to China using a pricing formula similar to Russia’s, but the price is $50 higher for every thousand cubic meters.
This time around, Moscow likely wants to rectify past mistakes and negotiate terms at least comparable to those enjoyed by Central Asian states. But China’s negotiators are also aware of the prices that Russia has agreed to in the past and of its cost position, so the existing arrangement serves as the anchoring point in the current talks. Why should China make concessions when its tough stance yielded results when Russia was in a far stronger geopolitical position?
On top of all of this, there are questions about the duration and quantity flexibility of the potential sales and purchase agreement. Given that most of the initial outlay for building the pipeline will fall on Moscow, it’s in Russia’s interest to demand a long contract with minimum flexibility. From an economic point of view, this is similar to buying property in order to rent it out: the owner wants tenants to pay regularly and in full, and doesn’t want to see the property being vacated soon after, particularly in the absence of other potential tenants. The higher the expected volatility of future cash flows, the higher the initial asking price must be.
The commercial lifespan of Power of Siberia 2 is also important. If there is certainty it will still be generating revenue in a quarter of a century, current payments do not have to be too high. But if the future is uncertain, there will be a desire for the project owner to recoup its outlays and break even much faster—while income streams can be guaranteed.
When it comes to a contract, the problem is not simply one of price. It’s a combination of price, flexibility, and length. For China, it’s obvious that once the pipeline is completed, it would be able to rely on Russian gas supplies for many years to come. But China only really knows its energy requirements for the next fifteen to twenty years: after that, it is unclear. Among other things, it’s difficult to predict how fast China’s renewable energy sector will grow.
The same is true of flexibility. Russian pipeline gas is far cheaper than the LNG that China buys on the spot market. But no one knows what the future holds. Perhaps Beijing will want to reach a long-term gas supply deal with the United States in order to ease political tensions. Or maybe Chinese companies will be able to get gas projects off the ground in Africa. Gas from such ventures would almost certainly be more expensive than Russian gas, but they would be Chinese-owned.
Such concerns are not uncommon when it comes to long-term contracts. But usually the prospective buyer (or seller) knows their counterpart has alternatives—and that acts as a spur to concluding a deal. However, in this instance, Russia does not have any alternative. So there’s no risk for China that it could lose Russia to a rival customer—only that deliveries will be delayed by the ongoing talks.
As a result, negotiations are slow and difficult. While China seeks maximum clarity on its future gas needs, it is also testing how far it can push Russia on price and other conditions. There is no cost to Beijing for dragging its feet over both these issues: Chinese negotiators do not believe there is any risk the deal will collapse, or that they will be obliged to make major concessions down the line.
On the other hand, the growing conflict between the United States and China might be changing the calculation in Beijing. While China previously sought to avoid irritating the United States by taking action that could be interpreted as support for Russia’s aggression against Ukraine, that is no longer the case. And sometimes a public gesture can be a useful political tool.
The shifting geopolitical tectonic plates mean that the Russian side will likely continue to shout from the rooftops about having reached yet another important milestone on the road to a deal over Power of Siberia 2. But as the Greek philosopher Zeno tells us, it doesn’t matter how close to the finish you are—an infinite number of steps still remain.
