“Power of Siberia-2”: Negotiations between Mongolia, Russia, and China — What It Means for GAZP Investors
Summary of the News
Mongolian media report that negotiations between Mongolia, Russia, and China regarding the “Power of Siberia-2” pipeline project may take place soon. For investors, this signals a return to the topic of the Eastern Gas Corridor in the current agenda and the likely advancement of contractual and technical preparations for the project.
Implications for Gazprom and GAZP Valuation
- Diversification of Sales: An additional route to China reduces dependence on specific markets and enhances cash flow stability.
- Potential Contribution to EBITDA: Long-term export contracts traditionally support revenue predictability and margin stability for the “Gazprom Export” segment.
- Investment Profile: A large infrastructure project reallocates CapEx, affecting free cash flow and dividends.
Route and Technical Framework
The project considers transit through Mongolia, connecting to the Russian gas transport system and China's receiving infrastructure. Market discussions are underway regarding capacity parameters in the range of “tens of billion cubic meters per year,” as well as phased commissioning. Exact volumes, pipeline configurations, and timelines remain subjects of negotiation and feasibility studies.
Project Economics: Key Drivers
- CapEx and Localization: Costs for pipes, compressor stations, service infrastructure, and the share of local content.
- Tariff and Pricing Formula: A long-term formula may rely on a basket of energy resources and/or hub indicators.
- Financing: A combination of equity, project financing, and contract advances.
- Tax Regime: Depreciation conditions and potential incentives in the project's jurisdictions.
Commercial Conditions: Critical Aspects at the Start
- Offtake Contracts: Agreement on offtake volumes, seasonal flexibility, and take-or-pay arrangements.
- Infrastructure Commitments: Synchronization of construction across all sections of the route.
- Transit Agreements: Long-term tariffs and capacity guarantees in Mongolia.
Market Impact and Capacity Balance
The launch of “Siberia-2” could redistribute gas export flows and stabilize the load of production centers in the medium term. For the Asian market, this means increased supply reliability and potential price smoothing during periods of high demand. For Gazprom, it ensures the steady realization of part of its resource base amid moderated price volatility.
Implementation Risks
- Contractual: Agreement on pricing formulas, indexing, and force majeure clauses.
- Construction and Logistic: Timelines for pipe deliveries, challenging sections of the route, and seasonal work variations.
- Regulatory: Permitting procedures, environmental requirements, and transit regulations.
- Financial: CapEx pressure on free cash flow and dividends during the active construction phase.
Scenarios for 2025–2028
- Base Case: Progress in negotiations, preliminary commercial agreements, initiation of preparatory works; CapEx stretched over phases.
- Accelerated: Early launch of key EPC contracts and pipe products, front-loading investments, and an earlier first delivery date.
- Cautious: Delays in agreements; shifting peak CapEx to the right, maintaining the dividend policy without significant adjustments.
What GAZP Investors Should Monitor
- Signatures on framework agreements regarding capacity, pricing, and delivery schedules.
- Financing decisions and disclosures regarding the CapEx schedule for the pipeline.
- Contracts for pipes and compressor stations, delivery timelines for equipment.
- Transit agreements with Mongolia and tariff parameters.
- Management's comments on the influence of the project on the dividend policy.
Conclusion for Portfolios
The potential negotiations regarding “Power of Siberia-2” bring the project back into the spotlight. For GAZP valuation, the pace of transition from political signals to commercial contracts, transparency in CapEx, and the design of the pricing formula are crucial. Under a positive scenario, the project strengthens medium-term cash flow visibility and enhances strategic sales diversification; meanwhile, investors should maintain risk discipline by monitoring key milestones and the sensitivity of free cash flow to the investment cycle.
