ECONOMY
Power of Siberia 2:
Russia to Keep Subsidizing Gas to China at a Loss
Russia to Keep Subsidizing Gas to China at a Loss
September 9, 2025
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Mikhail Krutikhin
Oil and gas market expert
Gazprom has recently reported progress in talks with China on the Power of Siberia 2 pipeline. Oil and gas market expert Mikhail Krutikhin argues that the colossal costs of building it will have to be swallowed so Gazprom can fulfill its obligations on the first Power of Siberia contract and that the project will never break even.
The original text in Russian was published in the Moscow Times and is being republished here with small changes at the author’s permission.
The consolidation of the Russia–China energy partnership underscores Moscow’s strategic pivot to Asia in the face of Western isolation, while giving Beijing greater leverage over its northern neighbor.
The consolidation of the Russia–China energy partnership underscores Moscow’s strategic pivot to Asia in the face of Western isolation, while giving Beijing greater leverage over its northern neighbor.
The leaders of Russia and China witnessed the signing of a major gas deal in 2014. Source: Russian presidential Website
Gazprom CEO Alexei Miller announced that the company had signed a memorandum with China National Petroleum Corporation and Mongolian officials on constructing the Power of Siberia 2 export pipeline through Mongolia. He described the document as “legally binding.”
Under the terms of the agreement, Gazprom committed to supply 50 billion cubic meters of gas annually via the future pipeline for 30 years. China also agreed to raise its annual offtake from the in-operation Power of Siberia pipeline from 38 bcm to 44 bcm starting in 2031 and to increase imports through the planned “Far Eastern route” — planned pipeline corridor delivering Russian gas from fields in the Far East (notably Sakhalin) directly to northeastern China — from 10 bcm to 12 bcm a year.
This looks like a breakthrough in the negotiations that Gazprom and the Kremlin have been conducting with the reluctant Chinese for years. Notwithstanding China’s reluctance, construction of Power of Siberia 2 has already started in Russia. Gazprom urgently needs the pipeline, which runs from fields in Yamalo-Nenets Region, to avoid breaking its obligations under the contract for the first Power of Siberia.
At present, the system cannot deliver the contracted volumes to China. The two fields feeding it – Chayanda in Sakha (Yakutia) and Kovykta in Irkutsk Region – together yield just 42 bcm a year. The gas contains unwanted nitrogen and helium, as well as raw materials for petrochemicals (like ethane, propane and butane). After removing that, only about 38 bcm remains for export.
The problem is that neither of the fields can sustain such output for the 30 years stipulated in the Shanghai agreement. Experts working at the fields claim that Gazprom is overexploiting them, artificially boosting well output. Even with these unsustainable methods, production has declined: average well flow at Chayanda has dropped from 224,000 cubic meters per day to 200,000 cubic meters per day. Annual output is just 21.3 bcm versus the planned 25.4 bcm. Things at Kovykta are no better.
Overly optimistic reserve estimates for these fields led Gazprom to sign a contract that was impossible to honor, causing a scandal inside the company and forcing costly corrective measures.
Without waiting for Chinese approval, Gazprom went into overdrive. Its construction arm, Stroytransneftegaz, opened an office in Novosibirsk to manage the project. Overall, Power of Siberia 2 is intended to link fields in Yamalo-Nenets with Kovykta and Chayanda. In the north, Gazprom is recommissioning long-mothballed compressor capacity to prepare for the future deliveries to Power of Siberia and is expanding pipelines already going that direction.
Sources inside Gazprom told the author that the company has selected 1,420-mm diameter pipes made of high-grade steel with a wall thickness of 38.1 mm, designed for an operating pressure of up to 150 atmospheres. They estimate the total costs – including compressor stations – at more than RUB 2 trillion.
Even before the memorandum was signed, it was clear that Power of Siberia 2 would go ahead – at least through Russia and Mongolia, where the project has been greeted enthusiastically.
The memorandum does not specify financing. Based on the experience of the first Power of Siberia – it was launched in 2014 amid fanfare and claims that China would contribute $20-25 billion, but was ultimately financed by Gazprom alone – the burden will again fall on the Russian side. China will pay only for infrastructure on its own territory.
The central question remains: at what price will this additional gas be sold to China?
The FT has reported that Beijing is demanding Russian domestic prices. Miller said the commercial terms would be announced separately. But it is possible that Gazprom has been forced to make concessions to secure Beijing’s consent to the project, since Putin effectively closed off the European market for the company.
Recall that gas supplied under the first Power of Siberia contract is priced not at the $400 per 1,000 cubic meters touted back in 2014, but at just over $200 per 1,000 cubic meters.
Amid the immense costs involved in gas infrastructure and field exploitation, Russia looks set to continue its policy of effectively subsidizing Chinese gas consumers – at a loss.
Under the terms of the agreement, Gazprom committed to supply 50 billion cubic meters of gas annually via the future pipeline for 30 years. China also agreed to raise its annual offtake from the in-operation Power of Siberia pipeline from 38 bcm to 44 bcm starting in 2031 and to increase imports through the planned “Far Eastern route” — planned pipeline corridor delivering Russian gas from fields in the Far East (notably Sakhalin) directly to northeastern China — from 10 bcm to 12 bcm a year.
This looks like a breakthrough in the negotiations that Gazprom and the Kremlin have been conducting with the reluctant Chinese for years. Notwithstanding China’s reluctance, construction of Power of Siberia 2 has already started in Russia. Gazprom urgently needs the pipeline, which runs from fields in Yamalo-Nenets Region, to avoid breaking its obligations under the contract for the first Power of Siberia.
At present, the system cannot deliver the contracted volumes to China. The two fields feeding it – Chayanda in Sakha (Yakutia) and Kovykta in Irkutsk Region – together yield just 42 bcm a year. The gas contains unwanted nitrogen and helium, as well as raw materials for petrochemicals (like ethane, propane and butane). After removing that, only about 38 bcm remains for export.
The problem is that neither of the fields can sustain such output for the 30 years stipulated in the Shanghai agreement. Experts working at the fields claim that Gazprom is overexploiting them, artificially boosting well output. Even with these unsustainable methods, production has declined: average well flow at Chayanda has dropped from 224,000 cubic meters per day to 200,000 cubic meters per day. Annual output is just 21.3 bcm versus the planned 25.4 bcm. Things at Kovykta are no better.
Overly optimistic reserve estimates for these fields led Gazprom to sign a contract that was impossible to honor, causing a scandal inside the company and forcing costly corrective measures.
Without waiting for Chinese approval, Gazprom went into overdrive. Its construction arm, Stroytransneftegaz, opened an office in Novosibirsk to manage the project. Overall, Power of Siberia 2 is intended to link fields in Yamalo-Nenets with Kovykta and Chayanda. In the north, Gazprom is recommissioning long-mothballed compressor capacity to prepare for the future deliveries to Power of Siberia and is expanding pipelines already going that direction.
Sources inside Gazprom told the author that the company has selected 1,420-mm diameter pipes made of high-grade steel with a wall thickness of 38.1 mm, designed for an operating pressure of up to 150 atmospheres. They estimate the total costs – including compressor stations – at more than RUB 2 trillion.
Even before the memorandum was signed, it was clear that Power of Siberia 2 would go ahead – at least through Russia and Mongolia, where the project has been greeted enthusiastically.
The memorandum does not specify financing. Based on the experience of the first Power of Siberia – it was launched in 2014 amid fanfare and claims that China would contribute $20-25 billion, but was ultimately financed by Gazprom alone – the burden will again fall on the Russian side. China will pay only for infrastructure on its own territory.
The central question remains: at what price will this additional gas be sold to China?
The FT has reported that Beijing is demanding Russian domestic prices. Miller said the commercial terms would be announced separately. But it is possible that Gazprom has been forced to make concessions to secure Beijing’s consent to the project, since Putin effectively closed off the European market for the company.
Recall that gas supplied under the first Power of Siberia contract is priced not at the $400 per 1,000 cubic meters touted back in 2014, but at just over $200 per 1,000 cubic meters.
Amid the immense costs involved in gas infrastructure and field exploitation, Russia looks set to continue its policy of effectively subsidizing Chinese gas consumers – at a loss.
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