Is Power of Siberia a pipeline of the future?

Is Power of Siberia a pipeline of the future?

The Power of Siberia pipeline is a 4,000 km natural gas pipeline. Upon its expected completion in 2019, it will be the largest fuel network in the world and fully consolidate Russia’s gas network from East to West. It will also have global political and economic consequences.

After a decade of stalled negotiations, China and Russia signed a $400 billion, 30-year contract that will result in Russia providing 38 billion cubic meters of natural gas to China, annually. During initial negotiations, Russia refused to accept a price below the average price of gas for Europe, which currently stands at $375-380 per 1,000 cubic meters.

However, Beijing managed to secure a favorable price of $350 due to its stronger bargaining position. China already possesses a reliable supply of energy from Central Asia, and Russia was eager to finalize the deal due to its deteriorating relations with Western Europe over the Ukraine crisis.

Putin gains upper hand with greater access to Asian markets

With a new and lucrative revenue stream, Russia will be better placed to withstand U.S. sanctions. At the domestic level, pipeline revenues would provide a major boon to Russia’s underperforming economy. This would allow Putin to stabilize his regime and quell any major threats of public dissent.

From a geopolitical perspective, Putin will have the ability to divert gas from Europe to markets in Asia as a diplomatic bargaining tool. The pipeline would lessen Russia’s dependence on the European gas market and in turn, provide greater leverage in its dealings with Western Europe. Consequently, Putin would gain more leeway to pursue an expansionist policy towards Russia’s former satellite states.

In fact, the pipeline is just the beginning of Russia’s strategic expansion into the Asian energy market, and proposals for additional networks in Japan, North Korea, South Korea, and India are already underway. Like the U.S. “pivot to Asia”, Russia is looking eastward and the construction of the pipeline and its subsequent dealings will result in enhanced Sino-Russian ties.

In addition, the pipeline has led to Japan and South Korea considering the prospect of their own LNG deals with Russia, a move that would align them closer to Russia at the expense of the U.S. As a result of these developments, the U.S. will be forced to reevaluate its role in the global energy market and address the rising challenge to its interests in East Asia.

A new market for Russian gas in Japan

Russia will likely surpass the U.S. as the leading exporter of gas within the next decade. Currently, the U.S. maintains that distinction by virtue of its “shale revolution.” However, the pipeline will enable Russia to exploit its natural gas reserves, which are the largest in the world. Market analysts believe that the sheer size of the Sino-Russian deal means that it will set the benchmark price for gas and also determine the market floor price.

Japan has entered the picture as another potentially market-altering force. Shortly after the Power of Siberia deal was announced, Japanese lawmakers made strides towards reviving a failed gas deal with Russia.

From a market perspective, Japan is the leading LNG importer and accounts for roughly 30% of global LNG shipments. In 2013, it spent $70 billion on imports to make up for the power generation capacity lost while replacing the idled nuclear reactors following the Fukushima disaster. Currently, Japan imports much of its LNG via tankers from regions as far as Qatar and pays some of the highest costs to do so.

For outside LNG suppliers like those in the U.S. or Canada, a direct pipeline to Japan and lower benchmark prices across the region would drive these suppliers out of contention.

What could the near future entail for gas markets?

Despite the entanglements in the Middle East and the increasing developmental agenda in Africa, Asia remains a key region for U.S. foreign policy. Regardless of which political party wins the 2016 election, the new administration will be forced to contend with Russia’s expansion into what the U.S. considers its sphere of influence.

The U.S. cannot hope to compete with Russia directly and will recognize that until EU countries can reduce their dependence on Russian gas, there will be little political appetite abroad to antagonize Russia.

Still, the shale revolution means that the U.S. can become a major energy exporter in its own right. U.S. policymakers could overturn the ban on crude oil exports while pushing forward a regulatory framework that addresses the concerns of local communities with regard to fracking. U.S. foreign policy could likely center on providing Europe with an alternative source of energy through its oil exports.

The introduction of new sources in the gas market will also be a critical factor. Africa has recently emerged as the next great LNG frontier and according to International Energy Agency estimates it holds nearly 10% of the world’s recoverable natural gas reserves. Despite the presence of several emerging economies with soaring populations in the region, there is still a considerable potential for export because of the sheer magnitude of reserves.

East Africa is in a particularly strong position to supply multiple markets since it is well situated to India’s western coast and to emerging markets in South East Asia. Despite the massive costs of building infrastructure, East African countries are aggressively pursuing funding from major developmental finance institutions to move forward on this front.

The U.S. already maintains a robust development portfolio in Africa. However, it could seek to aggressively leverage its role in major international institutions to further promote the financing of LNG and oil projects, a development that could be a major boon for potential investors in the region.

About Author

Sam Doo

Samuel is an IR professional interested in the crossroads of geopolitics and investigative research. He was previously a graduate associate at OPIC, a U.S. developmental finance institution that provides political risk insurance and financing options for emerging market investments. He also previously worked for INTERPOL. He holds a MA from George Washington University and a BA from the University of Michigan.