China has effectively priced Russia's flagship Power of Siberia-2 gas pipeline out of existence, demanding a price for gas that analysts say would make the project uneconomic and dealing another blow to the Kremlin's efforts to replace the European market it lost after the invasion of Ukraine.

Negotiations over the proposed pipeline have already being going on for a decade – similar to the time it took to strike the first deal for the Power of Siberia 1 (PoS1), now Russia’s only major gas export pipeline after the Nord Stream pipeline to Europe was blown up in September 2022 by Ukrainian partisans.

While the Kremlin has successfully reorientate all its oil exports to Asia, following the twin oil sanctions imposed by Europe at the end of 2022, gas exports are inherently more difficult. Oil can be put on a ship. Gas exports have to go through a pipeline that costs billions to build and a decade of construction. The PoS2 is particularly difficult as it would be one of the longest pipelines in the world, stretching thousands of kilometres from the Arctic down into mainland China via Mongolia across some of the most inhospitable territory on the planet.

The PoS1 is already running at capacity of 35bcm. It’s mooted sister, the PoS2, would have a nameplate capacity of 50bcm. The pipeline would become a major source of cheap energy for the underdeveloped northwest territories in China, however, as China is already the global green energy champion, for Beijing, adding a major supply of gas is a marginal addition to its gas mix, whereas for the Moscow, the new pipeline is one of the few export options left for exploiting its vast deposits of gas in the Yamal basin.

Moscow had hoped to secure an agreement during President Vladimir Putin's latest visit to Beijing, but according to a Wall Street Journal report, Chinese officials instead told the Russian delegation not to raise the issue again.

The sticking point is price. According to the WSJ, Beijing is prepared to sign a supply agreement only if Russia accepts a price close to its heavily subsidised domestic gas tariff of around $50 per 1,000 cubic metres.

That demand would represent a dramatic cut even from the discounted prices China already pays. Russian government forecasts show China paying around $258.8 per 1,000 cubic metres this year, some 39% below the estimated $420.2 paid by Gazprom's other export customers. The price is expected to fall further to $223.9 per 1,000 cubic metres next year.

Beijing appears to be pricing PoS2 out of existence. By insisting on gas at around $50 per 1,000 cubic metres, China is demanding terms that analysts say would make the project uneconomic.

Sergey Vakulenko, a senior fellow at the Carnegie Russia Eurasia Center and a former executive at Gazprom, estimates Russia would need around $125 per 1,000 cubic metres at the Chinese border simply to break even on the project. If the WSJ's account of the negotiations is accurate, Beijing's position amounts less to tough bargaining than to an offer Moscow cannot realistically accept, potentially killing off the Kremlin's flagship gas export project altogether.

Vakulenko has previously argued that while China could eventually absorb more Russian gas, it would not replace the profits once generated by Europe. Even under significantly higher prices than those reportedly demanded by Beijing, he estimated that Russia would earn only a fraction of the resource rents it previously received from European exports. In an earlier Carnegie analysis, he concluded that a netback of around $73 per 1,000 cubic metres for Gazprom "isn't bad either," but still implied annual resource rents of only $2.5bn-$4.3bn, compared with roughly $20bn generated by exports to Europe before the war.

The dispute underscores the increasingly asymmetric relationship between Moscow and Beijing. With Russia now heavily dependent on China as its largest remaining gas customer, Beijing has gained substantial leverage in negotiations while continuing to diversify its own energy supplies through Central Asian pipelines, liquefied natural gas imports and rapidly expanding renewable energy capacity. Beijing is under no pressure to do the deal. Moscow is.

As IntelliNews reported, Chinese officials are quietly preparing for a post-Putin Russia, cultivating ties with figures across the Russian political and business elite to preserve Beijing's long-term influence regardless of who eventually succeeds the Russian president.

If China refuses to soften its pricing demands, PoS2 may never get beyond the drawing board, leaving Russia with few options other than continuing to expand its LNG production for redirecting the gas volumes that once flowed west to Europe.