The signing of the MOU between China and Russia for the construction of a new gas pipeline, the Power of Siberia 2, connecting the two countries has sparked widespread international debate on the political, commercial, and economic implications of this megaproject, which extend far beyond the gas pipeline project itself. RiEnergia dedicates a lengthy interview to these aspects with Morten Frisch, an energy strategist, commercial gas contract negotiator and energy contract expert witness with fifty years of hands-on experience in the development and commercial operation of gas, LNG, and related projects sometimes applying more than 30 years’ time horizon. What emerges is a more complicated and critical picture than initially appears; a geopolitical and energy environment that highlights the importance of gas as a transitional energy source for many decades to come.
Power of Siberia 2: Symbolism or Reality?
Prior to Presidents Putin and Xi Jinping’s Shanghai Cooperation Organisation (SCO) summit meetings in Shanghai on 2 September, commercial teams from Gazprom and CNPC are understood to have been in “around the clock” gas contract negotiations. It can be assumed one of the tasks the Gazprom team had been instructed to complete for signature in the presence of Putin and Xi Jinping, was a gas supply contract for the Power of Siberia 2 project. This was not accomplished.
What was signed by Gazprom and CNPC on 2 September was a range of gas agreements. The signing of these agreements listed below was to further reinforcing the gas relationship between China and Russia. However, it is understood these gas sales negotiations had not been “plain sailing” for the Gazprom team.
A total of three key deals were signed on 2 September:
(1) Increased deliveries via the Power of Siberia 1 (PoS 1) pipeline from 38 bcm/y to 44 bcm/y;
(2) Increased deliveries via the Far East pipeline from Sakhalin from 10 bcm/y to 12 bcm/y (the pipeline is set to start operations in 2027 and ramp-up through 2030); and finally
(3) A Memorandum of Understanding (MoU) for the construction of the Power of Siberia 2 (PoS 2) pipeline systems. This is a 50 bcm/y mega-pipeline project and the MoU for its construction is understood to be binding.
No gas supply agreement for PoS 2 was entered into at the SCO summit. Without a legally binding gas supply contract, who is going to build a 3000 km long, 50 bcm/y pipeline? The cost of the PoS 2 alone is estimated to require $13–15bn, with total infrastructure costs exceeding $27bn.
How was the signing of the MoU for the construction of the PoS 2 perceived internationally, in China and Russia?
Internationally the entering into the binding PoS 2 MoU for the pipeline project together with the signing of the increased delivery volumes for the POS 1 and the Far East pipeline systems are seen as important strengthening of the China/Russian energy axis. The fact China now has started to take delivery of LNG cargoes from Russia's sanctioned Arctic LNG 2 project – the fourth such LNG was discharged at a Chinese port on 14 September – has strengthened the perception of this energy axis further.
It should also be noted, it is reported India’s Prime Minister Modi who participated in the SCO summit settled India’s border disputes with China at the start of the meeting. It can therefore be assumed India has also joined this energy axis, a situation that is confirmed by India’s continued imports of sanctioned Russian crude oils.
In China the signing of the MoU for the construction of the PoS 2 is seen as a positive step in its long term policy to diversify energy supplies and in particular to move away from the import of LNG from the USA.
Based on newspaper reports from Russia, the entering into the PoS 2 construction MoU has been presented by Russian authorities as a major positive development in Gazprom’s quest to find new markets for its pipeline gas exports to replace gas markets in EU member countries. What these reports fail to mention is the fact the Chinese drive a hard bargain. Gazprom’s gas export through PoS 1 to China is not anywhere near as profitable as its pipeline gas exports to EU member countries would have been, if PoS 1 gas sales are profitable at all!
The signing of the MoU for the construction of the PoS 2 pipeline systems has as far as I can see not been reported on the Gazprom website or its LinkedIn profile.
There is certainly a new momentum in China/Russian gas relations, but let us be cautious and not jump too quickly to conclusions. Before PoS 1 was built there was a twenty (20) years period of MoUs. The Russians must be hoping that this time might be different, but Gazprom’s negotiators failed to reach agreement on a gas sales agreement with CNPC prior to the 2 September deadline.
2) The announcement of a deal being reached for Power of Siberia 2 has the potential to be the most consequential news of the year for LNG markets. What are your thoughts on this, and why?
China’s energy policy is to have a balanced mix of primary energy supplies – coal, crude oils and gas/LNG. The country is prioritising domestic coal, oil and gas production to improve its security of energy supply and also to strengthen its balance of payments.
With President Trump in the White House and US LNG imports subject to Chinese escalating retaliatory tariffs, China has a clear desire to move away from imports of US LNG. As a result of these tariffs on US LNG cargoes, imports of US LNG have effectively halted since early February 2025 due to the prohibitive import costs caused by the import tariffs. Chinese buyers or lifters of US LNG cargoes have as a result been forced to divert all US sourced cargoes to LNG import terminals in third party countries in Asia and Europe.
In the short to medium term increased pipeline gas imports from PoS 1, the Far East pipeline and also increased pipeline imports from Central Asian republics together with increased domestic gas production is used by China to replace imports of US LNG. So far in 2025 Chinese LNG imports have been reduced by some 20 percent compared to 2024, a development that has been supported by favourable climatic conditions as well as reduced energy consumption by industrial consumers.
In the longer term the 50 BCM/Y of pipeline gas due to be delivered from the PoS 2 project could potentially reduce China’s LNG imports even further. BUT in my opinion gas imports through the PoS 2 will take some seven (7) to potentially ten (10) years to flow after binding contracts for the purchase of PoS 2 pipeline gas has been signed by CNPC and/or other Chines gas buyers. There are no signs such a PoS 2 gas purchase agreement will be signed anytime soon.
As explained, the signing of the MoU for the construction of the PoS 2 project will not have any immediate consequence for the LNG market. However, the PoS 2 project sends a clear message to US LNG export plant developers that had hoped to sign long term agreements with Chinese LNG buyers whether for LNG liquefaction capacity or the supply of LNG. The message is clear: do not relay on the Chines gas market as a customer to reach FID for your LNG liquefaction plant project.
3) Power of Siberia 2 isn't the only mega gas pipeline project around the world. In this issue of RiEnergia, we discussed the Panama Transoceanic Pipeline and the one that should connect Uruguay with Brazil. Are there other major projects we haven't discussed but which are highly strategically important?
Energy transition projects in OECD countries are running behind schedule while costs for these projects are going up exponentially as is being demonstrated by Germany and also the UK, both as examples.
Hydrogen will in my opinion due to the laws of physics and therefore low efficiencies and prohibitive costs never become a major energy carrier regardless of colour. As a result European countries will need natural gas in much larger quantities and for much longer than currently envisaged by the European Commission and European governments.
All pipeline gas supplies from Russia to European countries are now in the process of being stopped permanently (at least until the war in Ukraine has ended).
Norway is today supplying one third of European gas supplies by pipelines, but based on current projections Norwegian gas production will start to fall around 2030 unless new gas fields are found and developed for production and export. Most Norwegian gas reserve potential is in the far north in the Norwegian and Barents Seas. To encorage the exploration for and development of these high North gas resources new long term gas supply agreements should be entered into by European gas buyers. Most Norwegian pipeline gas exports are today being sold on a spot or short term basis as a result of European energy transition policies.
In addition to Norway, Algeria is also an important supplier of pipeline gas to Europe. The same applies to Azerbaijan. Like Norway, both countries urgently need new long term gas supply contracts to underpin their gas exploration and development efforts. For example Algeria in addition to conventional gas reserves, has large shale gas deposits that could be an important source of gas for Italy, Switzerland, Austria, Slovakia, Hungary, Spain, Portugal and France.
It should also be mentioned that countries such as the UK, Germany, Romania and Bulgaria all have untapped gas reserve potentials. In the UK oil and gas E&P activities are being hindered by fiscal policy, while in Germany a ban on hydraulic fracturing is preventing valuable domestic gas production from taking place.
Increased oil and gas E&P activities within European countries would create valuable economic activities and improve the balance of payment of the producing country.
Domestically produced natural gas under European regulations would also have a much smaller carbon density in total from production, processing and transportation to energy end customers than regasified imported LNG. Regasified LNG would in the case of LNG imported from the USA have a total carbon density from production, processing, transportation and regasification being between 15 and 20 time higher than domestically produced natural gas delivered by pipeline. How can these very positive both economic and environmental attributes be ignored by the European Commission and European governments?
4) In a move toward net zero, don't all these highly expensive projects, with their decades-long life cycles, seem redundant? Is there a risk that, if they were actually built, they would not be used, or do these confirm that gas will still be needed for a very long time?
As discussed under 3 above, European countries will need natural gas in much larger quantities and for much longer than currently is anticipated. Asian emerging economies and the same applies in South America and to a lesser extent in Africa, will see rapidly increasing energy demand.
Asian countries urgently needs to replace coal with regasified LNG in power generation, but currently the price for delivered LNG at US$ 11/MMBtu to US$ 12/MMBtu is too high for coal to gas switching. If the price for LNG delivered ex-ship to Asian countries could be brought down to below US$ 9/MMBtu, Asian LNG demand should increase substantially.
It is my firm view gas will be needed for a very long time and its share of energy markets, particularly in developing economies, will be dictated by the price of delivered LNG.
As a result of natural gas being needed around the world in much larger quantities and in my opinion well past 2050, I do not see new pipeline gas or LNG projects with their decades-long life cycles becoming redundant.
