Sino-Russian energy ties and Mongolia’s “renewables curse”
Mongolian solar and wind could displace Russian gas exports to China
Mongolian solar, wind, and Green Hydrogen production could, over the long-term, significantly displace or even eliminate Russian natural gas export volumes to China, reshaping the relationship between the world’s two most powerful authoritarian states. Mongolia is emerging as a key but under-the-radar element in China-Russia relations.
The Power(s) of Siberia
After over a decade of negotiations, in 2014 China and Russia agreed to 30-year, $400 billion USD terms over the Power of Siberia natural gas pipeline, enabling Gazprom to export up to 38 billion cubic meters per year of natural gas (~3.7 billion cubic feet/day) to Russia’s energy-hungry neighbor. While Gazprom was stuck with financing most of the construction costs – a sticking point in negotiations – neither Russia nor China has ever disclosed the Power of Siberia’s contract terms, leaving many analysts to conclude that the pipeline is not financially viable for Russia, China, or both.
Prospects for an additional Russia-to-China pipeline, often referred to as the Power of Siberia 2 or Altai pipeline, may have peaked last summer. In January, Gazprom announced it would complete a feasibility study for gas transit through Mongolia. In a April 12, 2021 press release, however, Gazprom announced that the analysis for the Mongolian line of the Power of Siberia 2 had been approved – but also that the “feasibility study regarding the construction project… will be developed before the end of this year.”
Lukewarm Chinese interest may have contributed to Gazprom’s apparent lack of urgency. Chinese officials do not appear to have mentioned Power of Siberia 2 since summer 2020, Russia’s recent opening of the Amur Natural Gas Processing Plant wasn’t prominently reported in official Chinese state media, and potential new hydrocarbon projects (particularly ones with 30 year lifespans) contradict Beijing’s climate targets.
Why have Power of Siberia 2 negotiations apparently stalled?
Indeed, the environmental and economic landscape has changed since Gazprom and CNPC first inked Power of Siberia’s contract in 2014. Natural gas’ role in the energy transition faces greater environmental scrutiny while Russian natural gas is notoriously methane-intensive. Facing greater international criticism for its status as the world’s largest polluter, China might also hesitate to commit to several more decades of carbon-intensive natural gas imports.
Standard economic cost-benefit calculations have likely shifted Beijing’s perceptions on Russian natural gas more than environmental or reputational concerns, however. Pipeline natural gas megaprojects, particularly ones with 30 year terms and decade-long construction schedules, are being outmuscled by other energy sources.
Pipeline Natural Gas and its competition
Liquefied natural gas, or LNG, has become a viable alternative to pipeline natural gas, while China’s astonishing levels of coal use have constrained natural gas demand. Solar and wind are not perfect substitutes for natural gas or coal, but they can displace many hydrocarbon uses and are already highly competitive fuel sources for electricity generation. Furthermore, technological progress has dramatically reduced the cost of renewables: solar and wind costs have fallen 90% and 71%, respectively, in just a decade. Renewable could become even more competitive, particularly if Green Hydrogen becomes viable.
Green Hydrogen, according to Renee Cho, “is hydrogen fuel that is created using renewable energy instead of fossil fuels. It has the potential to provide clean power for manufacturing, transportation, and more — and its only byproduct is water.” Green Hydrogen could serve as a perfect substitute for natural gas, enable solar and wind production, and dramatically reduce carbon emissions. Green Hydrogen technology is in its infancy, however, and will probably not be cost-competitive until 2030 at the earliest.
Since Green Hydrogen could render natural gas (and crude oil) obsolete, energy stakeholders in both China and Russia are undoubtedly paying close attention. Russia’s Far Eastern and Siberian renewables potential is believed to be quite low; Gazprom is unlikely to ever export Russia-sourced Green Hydrogen to its neighbor. But since natural gas pipelines may be able to transport Green Hydrogen safely and economically, Gazprom may be able to repurpose existing infrastructure. In fact, Chinese (and possibly Russian) energy leadership may be open to routing the Power of Siberia 2 pipeline through Mongolia due to that country’s renewable and Green Hydrogen potential.
Mongolia’s renewables riches
Mongolia’s rich wind and solar resources represent a serious medium and long-term threat to Russian natural gas exports to China (besides developments within China’s own domestic energy market, of course). Mongolian renewables already enjoy geographical proximity and environmental advantages over Russian natural gas exports. More importantly, due to rapidly declining solar and wind costs, Mongolian renewables projects likely already economically outcompete Russian natural gas for new incremental Chinese electricity demand. Solar and wind technologies will likely continue to improve, sending costs lower, constraining or even curtailing Russian natural gas export volumes.
Within 10-15 years, it’s conceivable that Mongolian solar and wind, paired with Green Hydrogen, could displace existing Russian natural gas volumes or even shutter the Power of Siberia. The most economical Green Hydrogen projects will be in regions with co-located wind and solar resources. Since southeastern Mongolia enjoys both resources in abundance, not to mention proximity to Northeastern Chinese consumer markets, the region could be an ideal location for Green Hydrogen projects.
The rise of Mongolian renewables is hardly foreordained, however. It is easy to draw up on paper how Mongolia could supply wind, solar, and Green Hydrogen to the Chinese market. In practice, Mongolian renewables will face considerable technical, political, and, perhaps most importantly, geopolitical risks.
While Mongolia could export significant solar and wind generation volumes to China even if Green Hydrogen technology fails to improve, setbacks could severely constrain Mongolia’s renewables potential. Technical and political risks could prevent Mongolia from achieving even modest ambitions (such as solar and wind generation untethered to Green Hydrogen) from reaching fruition. Siting and executing Mongolia-to-China generation and transmission projects will not be easy: Mongolian terrain is often extremely inhospitable, infrastructure connectivity is poor, skilled and unskilled labor would likely have to be transported into the region, and maintenance is a major risk factor. Moreover, actors on either side of the border might be threatened by the project or view transmission infrastructure as disruptive. Protests, foot dragging, and logistical challenges could lead to cost overruns and render Mongolian renewables uncompetitive.
Mongolia’s near neighbors
Geopolitical risks pose even greater dangers for Mongolia’s solar, wind, and Green Hydrogen development. In a worst-case scenario for Mongolia, the steppe could become a flashpoint in Russo-Sino tensions, with Mongolia’s sovereignty eroding before one or more of its powerful authoritarian neighbors. While Mongolians might prefer that their country remain a geopolitical backwater, bordering governments – not to mention inexorable market forces driving world renewables adoption – will get a vote.
There are already some indications that Moscow and Beijing are jostling for influence in Mongolia. Russia and Mongolia have held combined military exercises since 2008, while the Selenga-2020 exercises went ahead in October and November 2020 despite the pandemic, indicating the importance both sides attach to their military relationship. Nevertheless, Moscow’s influence in Ulaanbaatar may be rapidly eroding in the face of Beijing’s superior economic, financial, and public health capacities. China’s trade and investment with Mongolia easily outpaces Russia’s, and Beijing appears to have decisively won its subtle vaccine competition with Moscow: China has provided millions of doses to Mongolians, while Russia has only shipped 60,000 vaccines to its neighbor. In an interview with the New York Times, a senior Mongolian health official explicitly compared the Sinopharm vaccine to the Astrazeneca and Sputnik V alternatives and said that Mongolia made “the right decision” to vaccinate with Sinopharm.
A recent incident could indicate increasingly open competition between Beijing and Moscow. On May 28th two Mongolian intelligence officers were supposedly sentenced to 14 years in prison for passing information to Russian security services. Assuming this reporting is correct, Mongolian counterintelligence officials might have uncovered and publicized a Russian spy ring on their own – or they may have received “friendly” support and advice from Chinese security services.
Mongolia’s future is complicated and possibly dangerous
Mongolia faces an enormously challenging undertaking. In the near-term, both China and Russia will likely turn more attention to Mongolia due to the country’s mining resources; potential role as a Power of Siberia 2 transit route; and, most importantly in the long-term, its wind, solar, and Green Hydrogen potential. With Sinopec already investing $3 billion in a solar, wind, and Green Hydrogen facility in Inner Mongolia (a Chinese region immediately across the border that possesses less favorable wind and solar resources than Mongolia), Beijing may already be eyeing the region’s renewables potential.
While Chinese investment in Mongolian renewables could improve living standards and environmental outcomes on both sides of the border, it also poses enormous challenges for Mongolian sovereignty. Nor are Russian interests necessarily aligned with Mongolia’s: Russian natural gas exports to China could face pressure if Mongolia is able to develop its solar and wind resources, while Mongolian Green Hydrogen could render the Power of Siberia obsolete. Mongolia’s renewable capacities may increasingly place it towards the center of China-Russia relations and possibly even world geopolitics. Mongolia’s renewables capabilities could prove to be a blessing – or a curse.
Until next time,
The China-Russia Report is an independent, nonpartisan newsletter covering political, economic, and security affairs within and between China and Russia. All articles, comments, op-eds, etc represent only the personal opinion of the author(s) and do not necessarily represent the position(s) of The China-Russia Report.