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
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.
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.
Rosneft also has vast experience in China, having played a big role in Russia becoming China’s largest oil supplier since 2016.
However, Europe and China are supplied by different export pipelines in different resource zones. Moreover, Russia is not about to replace Europe with China: Europe accounts for 70 per cent of revenues at Gazprom, which contributes 5 per cent of Russia’s economy.
As for US LNG, northeastern China – the area supplied by the pipeline under phase one – lies outside the target customer base. Moreover, gas from the pipeline is meant to displace the heavy use of coal in the region, rather than compete with other gas sources.
The pipeline may reduce this asymmetry by increasing China’s dependence on Russian gas from almost zero to one-sixth of China’s import requirements and 9.5 per cent of its total gas consumption.
But, given that China has a well-diversified base of gas suppliers and supply routes, Russia’s dedicated pipeline to China may well leave Russia with increased dependence on Chinese demand instead.
With the Power of Siberia pipeline progressing and Xi’s promise to achieve blue skies through coal-to-gas switching, negotiations on the second pipeline have begun.
Given that negotiations for the first pipeline took 10 years, when the second will be commissioned remains to be seen.
Nevertheless, marketing gurus would probably still approve of the loss-leader strategy behind Russia’s Power of Siberia gas pipeline to China.
Li-Chen Sim, an assistant professor at Zayed University in the United Arab Emirates, is an expert on the political economy of energy in Russia and the Middle East