China, Russia And The Global Natural Gas Market – Big Changes Now Likely

China and Russia have now given the go ahead for one of the world’s most consequential natural gas deals in a decade. During the recent meeting of the Shanghai Cooperation Organization in Tianjin, China, leaders Xi and Putin signed a memorandum for the Power of Siberia 2 pipeline to go forward. This comes after years of jammed negotiations over price and cost issues.

Seeing no signs of change, companies in a host of countries, above all the U.S., pursued major plans to build costly new gas export facilities, seeing China, the world’s largest importer, as an ever-growing market. The announced memorandum therefore sent shock waves through the industry.

Details of the deal are yet to be worked out. Some of its intentions, though, are clear. The pipeline would be a needed boost to Russia’s war economy and a strong sign of Russian-Chinese ties. For China, it counts as a loud and clear message to the West that Beijing will reject any and all sanctions against such supply from Russia. No less, it doesn’t mind derailing Donald Trump’s desire to expand America’s fossil fuel “dominance.”

Impacts Would Be Serious And Not Just For The U.S.

According to the International Energy Agency, between 2025 and 2030 as much as 300 billion cubic meters of new export capacity for liquefied natural gas will come online. That’s a big number, only slightly less than what the entire EU consumed in 2024.

About half of the new capacity is due to be built in the U.S., the world’s largest LNG exporter. The other half would come from an array of nations: Canada, Qatar, Malaysia, Mozambique, Mexico, Argentina, Senegal, and Nigeria, among others, who are either already suppliers to China or have plans to be in the next few years.

Driving this new LNG construction is growing worldwide demand for natural gas, mainly as a lower carbon substitute for coal in power generation, heating, and industry. China’s annual demand, at about 80 bcm, has risen to be the world’s largest and is naturally the intended target for much new export capacity.

For a major importer like China, a pipeline has several advantages over LNG. Pipeline gas is considerably cheaper and its price can be controlled, thus avoiding the volatility of regional LNG markets. There is also concern about marine transport of LNG over tens of thousands of miles, through choke points such as the Panama Canal, Suez Canal, or Straits of Hormuz.

The key point, however, is that significant supply from the pipeline will weaken the economics of new export facilities and depress the global LNG market. This applies, above all, to the U.S. Such facilities are highly capital-intensive and thus sensitive to changes in market demand. The Power of Siberia 2, whose annual capacity is 50 bcm, could replace at least a third of China’s total LNG imports if it were run at only half this volume.

What Other Factors Might Help Or Hinder The Deal?

To say Moscow has been eager for the pipeline would be diplomatic. Russia has been desperate to offset the loss of its European market after invading Ukraine. The Power of Siberia 2 won’t solve this problem, far from it. But it could provide an important export route for gas production in the Arctic Yamal Peninsula, Moscow’s largest new project, which has been plagued by sanctions and a shortage of ice-class LNG tankers able to traverse the Northern Sea route.

The pipeline’s 50 bcm capacity makes it a near-replacement for the Nord Stream 1, formerly the largest single line into Europe. But whether China wants that much Russian gas is another question.

It’s one of the questions that has held up the project. Russia has wanted to sell more than Beijing was willing to buy. The other issue was how the gas would be priced: China argued for Russia’s heavily subsidized domestic rate, while Gazprom, the Kremlin’s national gas company, much preferred market prices in Asia, typically twice as high. How these challenges might be resolved isn’t clear. That doesn’t mean it won’t happen, however.

Another factor is the pipeline route, which goes through the heart of Mongolia. The Mongolian government has consistently favored the project, and its current president, Kurelsukh Ukhnaa, reaffirmed this at a recent trilateral meeting in Beijing with Xi and Putin. Mongolia would gain from both transit fees and possible gas supply for its own energy needs and economic development, now overly dependent on indigenous coal. At the same time, it stands to find itself squeezed between the self-interests of two major powers.

A Determining Factor Could Turn Out To Be Another Source of Gas—China Itself

In this situation, Russia may seem to have acquired a strong hand with the new agreement. But the truth is that China holds most of the cards. A big reason is that it has many other suppliers and so gives itself options. This is called risk management, whether the subject be eggs in baskets or critical resources and imports. To underline the point, Russia depends on China for nearly half of its oil exports, while these comprise only 17.5% of Chinese imports.

China may also have an ace up its sleeve. As much as 60% of its total gas needs are met by domestic production, which has been surging since 2017. Though a large portion is from conventional drilling, China has made it a central energy goal to develop its huge unconventional sources: tight gas, shale gas, and coalbed methane. As of late this year, these will together exceed conventional production and will climb from there as the dominant contribution.

As I noted in a previous Forbes article, estimates give China the largest shale gas resources of any country, more even than the U.S. Though these have proven more difficult to exploit, major progress has been made, as large new discoveries show.

There is no doubt this group of sources has kept China’s imports far lower than they would otherwise have been. Their growth, in fact, has been more rapid than total consumption, suggesting they could erase an amount of imported gas going forward. That, clearly, is the plan. As Beijing has repeatedly stressed in its 5-Year Plans, a fundamental goal is to render the country as self-sufficient in resources and technology as possible.

What We Can Say About The Pipeline Deal At This Time

For now, the new pipeline deal between Russia and China will shift the geopolitics of natural gas more than a few degrees. It puts China in the driver’s seat as a swing player in the global LNG landscape, while setting U.S. gas companies on eggshells.

It shows China willing to give Russia added support for its war against Ukraine. And it confirms Xi, like Putin, is likely to resist any further sanctions or other measures that seek to limit his country’s access to needed resources.