Page 8 - FSUOGM Week 36 2019

FSUOGM COMMENTARY FSUOGM
China, Russia mull
new gas pipeline
A plan to build a pipeline through Mongolia is unlikely to make headway fast
RUSSIA
WHAT:
Russia and China are discussing a gas pipeline through Mongolia.
WHY:
Several options for a second pipeline joining Power of Siberia are on the table.
WHAT NEXT:
It is likely to take the two sides considerable time to agree on a gas price.
CHINA and Russia appear to have revived talks on an on-again, off-again plan to run a natural gas pipeline through Mongolia.
Officials from Russia’s state gas supplier Gaz- prom and its Chinese counterpart CNPC met for talks in Beijing earlier this month. And on September 9, Russian President Vladimir Putin held a briefing with Gazprom CEO Alexei Miller, ordering him to consider the transport of gas through Mongolia.
“Please, look into the resources of [the] Yamal [Peninsula] as well, in order to gather the nec- essary resources for the supplies via the west- ern route to China via Mongolia,” he told the company chief, adding that Russia’s partners in China also “lean toward” developing a Mongo- lian gas route.
Russia, the world’s biggest gas producer, is set to carve out a share of the growing Chinese gas market with the launch of piped supplies this December. This milestone will be possible thanks to the completion of Power of Siberia, a 3,000-km pipeline capable of pumping up to 38bn cubic metres per year of Siberian gas to China’s densely populated east.
Moscow and Beijing have been debating the construction of a second cross-border pipeline for years, but as yet, no binding agreements have been made. Several options have been floated, including pipes entering China from Vladiv- ostok in the Far East and the Altai region next to Kazakhstan.
Building a gas pipeline between two coun- tries is rarely an easy undertaking, requiring both strong political will and a firm commer- cial rationale. In China and Russia’s case, price has traditionally been a sticking point in talks. Gazprom and CNPC held discussions on a large- scale supply deal for Power of Siberia for a dec- ade before reaching a $400bn sales and purchase agreement in 2014. As such, it is likely to be some time before Beijing and Moscow commit to a second pipeline’s construction.
Russia’s preference is a route through Altai, which would help reduce investment costs, as Gazprom would be able to pump gas from already-developed fields in Western Siberia. However, a Mongolian route may be more convenient to China, as VTB Capital argued in a research note on September 10. Whereas the Altai pipeline would enter China in its sparsely populated Xinjiang province in the northwest, a Mongolian pipeline would arrive
in its industrialised east. The latter’s route to Beijing is also shorter, at only 4,800 km com- pared with 5,700 km for the Altai option, the bank noted.
The project would also bring considerable benefits to Mongolia. Besides receiving lucrative revenues for transiting Russian gas, Mongolia would also be able to use some of these supplies to generate electricity, provided it invested in new power generation facilities. This would help the Central Asian country wean itself off coal and tackle pollution in its larger cities.
“Overall, we believe that this is a complicated project to negotiate with China, especially given the low gas prices globally due to the abundance of gas and LNG supplies,” VTB Capital said. “We do not expect any material progress in the near term.”
Pipeline negotiations are hard enough with only two countries taking part, let alone when they involve a third, transit country as well, how- ever. And Gazprom might do better to focus on expanding its LNG business instead, enabling it to capture more market share globally rather than in a single country. The state company has fallen behind its domestic competitor Novatek in this area. Novatek is developing a hub for LNG exports in the Arctic, with plans to produce as much as 70mn tonnes per year of the super- chilled gas by 2030.
What is more, Russia is not the only gas sup- plier vying for the Chinese market, with Kazakh- stan, Turkmenistan and Uzbekistan all hoping to ramp up pipeline shipments as well. The market is also contested by leading LNG exporters Aus- tralia, Qatar and the US. ™
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Week 36 11•September•2019