bne IntelliNews – Could Mongolia host a China-Russia pipeline?
Russia proudly unveiled in 2019 its plan to build a second gas pipeline to China, this time crossing Mongolia. As the EU pushes to sever all energy ties with Russia, Moscow now appears to be pushing for an oil pipeline that would also run through Mongolia.
Russian President Vladimir Putin met his Chinese and Mongolian counterparts Xi Jinping and Ukhnaagiin Khurelsukh at a Shanghai Cooperation Organization (SCO) summit in the Uzbek city of Samarkand on September 15. The three parties are already collaborating on Power of Siberia 2, aiming to pump some 50 billion cubic meters a year of gas from Russian fields that currently serve European customers to China via Mongolia. A supply contract to support the pipeline is not yet in place, but Russian Deputy Prime Minister Alexander Novak said last week he expected a contract to be signed shortly.
Now that the EU is preparing to impose an embargo on Russian oil imports within months, it seems that discussions are also underway on an oil pipeline through Mongolia.
Mongolia’s Khurelsukh said at the summit that his government supports the construction of not only gas pipelines but also oil pipelines across the territory of the country. No pipeline project through Mongolia has yet been formally proposed, but the commentary says it is something the three parties are considering.
Russia is scrambling to find new destinations for its energy exports as EU imports continue to decline. The country already pumps 1.6 million barrels per day (bpd) to China and other Asian markets through the Eastern Siberia-Pacific Ocean (ESPO) pipeline system. Its other option is to send crude through Kazakhstan, but along both routes the flow of oil is now close to maximum capacity, creating a bottleneck at a time when Russia is keen to divert so much oil. as possible to Asia and away from Europe.
Running an oil pipeline through Mongolia would solve this problem. Its most logical starting point would be the Tayshet hub in the west of the Irkutsk region, where ESPO connects to the rest of Russia’s oil transport system. First, it would provide a fairly direct route through Mongolia to the Chinese east coast, passing the Mongolian capital of Ulaanbaatar. Second, there is the matter of Russia’s different oil mixes. ESPO hauls sweet crude from the fields of Eastern Siberia which generally sells for a higher price than the sour Urals crude produced in Western Siberia. The pipeline through Mongolia could transport sour oil from West Siberia to China which is currently being sold to Europe, while ESPO could continue to pump sweet crude. Keeping the streams separate would allow Russia to continue to get a premium for ESPO blend oil and separately offer sour grade to Chinese refineries designed for it.
For China, an additional pipeline from Russia would help reduce its reliance on supplies shipped through the Strait of Malacca, seen as a geopolitical vulnerability. China could also negotiate interests in the upstream Russian fields that supply this oil, strengthening its position in the country’s energy sector.
Mongolia, meanwhile, would gain lucrative transit revenue, but also, more importantly, access to the oil supply itself. This would allow the country to fast-track plans for its first oil refinery, which is tentatively scheduled to launch in 2025. The country is currently entirely dependent on imported petroleum products. Hosting an oil pipeline, in addition to a gas pipeline, would also increase Mongolia’s role as a facilitator of energy trade between China and Russia, giving it some leverage over its two closest neighbors. powerful.
On the Russian side, a pipeline project would run into similar hurdles as Power of Siberia 2 faces. Cut off from Western financial systems, Russia may find it difficult to obtain financing. China could in theory step in with support, but Beijing is likely to be less enthusiastic about such a project than Moscow, which is desperate to find new markets to replace those it is losing in Europe.
Exploiting Russia’s desperation, China could negotiate hard on prices and demand increased access to Russian upstream industry in return for supporting the project. Moscow has tried to put a positive spin on the exit of Western majors from its oil sector in response to the war in Ukraine, saying it is regaining control of its resource wealth. But Russia may have to cede that control back to China.
Russia is already competing with Saudi Arabia for the crown of China’s top oil supplier. And it’s unclear whether China would be comfortable expanding its already sizable energy relationship with Russia even further, especially if Power of Siberia 2 goes ahead as planned. Beijing has strived to have a diversified energy import mix, for security reasons. And Russia will not go ahead with a pipeline project without having a supply contract in place to cover most of its throughput capacity.
It is also important to note that while Russia and China have come together to oppose Western hegemony, their relationship continues to be characterized by a degree of mistrust and suspicion. Namely, Russia is concerned about the expansion of Chinese influence in the Far East and Central Asia. In its energy war against Europe, Moscow has demonstrated its willingness to use energy supplies as a weapon, which likely alerted Beijing to the dangers of entrusting its energy security to the Kremlin.