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AsiaElec COMMENTARY AsiaElec
Russia’s $55bn Power of Siberia gas pipeline to China comes online
Russia creates new export options in Asia, while China aims to open up the economy of its underdeveloped northwest regions
CHINA
RUSSIA’S Gazprom commissioned its flagship Power of Siberia gas pipeline project on Decem- ber 2, paving the way for shipments of billions of dollars of Siberian gas to China each year.
The 3,000-km pipeline will carry gas from the Chayandinskoye and Kovytkinskoye fields in Eastern Siberia over at least three decades, flow- ing 38bn cubic metres of gas each year when it reaches maximum capacity.
“This is a genuinely historical event not only for the global energy market but above all for us, for Russia and China,” said Russian President Vladimir Putin, who watched the launch via video link from Sochi.
“This step takes Russo-Chinese strategic cooperation in energy to a qualitative new level and brings us closer to [fulfilling] the task, set together with Chinese leader Xi Jinping, of tak- ing bilateral trade to $200 billion by 2024.”
Economic rationale
Russia relies on Europe for the vast bulk of its gas exports, with volumes totalling just under 200bcm annually. But in recent years it has strug- gled with flat demand for gas on the continent as well as rising competition from LNG.
Gazprom was stung by a 45% drop in net profits in the third quarter, blaming the decline on lower exports to Europe and weaker prices. Power of Siberia will help diversify the compa- ny’s revenue base by opening a route for large- scale shipments to China, the world’s biggest gas importer.
There is a clear economic rationale for Russia
to connect its sizeable gas resources with China’s burgeoning gas market. Russia has almost 39 trillion cubic metres in proven gas, according to BP data, but it has struggled to develop resources in its east because of a lack of export options.
For its part, China is keen to pipe gas to its northwest territories as they remain underdevel- oped and sparsely populated, with the bulk of its population living along the coast in the southern half of the country.
The road to Power of Siberia’s completion was beset with difficulties. Beijing and Moscow began discussing the project seriously more than a decade ago, though negotiations were marred by wrangling over the price of gas supplies for many years. It was not until 2014 that Gazprom signed a $400bn, 30-year gas supply deal with its Chinese counterpart CNPC that made its con- struction possible.
Pricing
The price China has secured for Russian gas remains a closely guarded secret, though Beijing is widely believed to have had cut a lucrative deal by exploiting Russia’s economic and political isolation following its annexation of Crimea in early 2014.
VTB Capital said in a research note on December 2 it expected China to pay a price on a pair with those paid by Gazprom’s customers in Western Europe, which should come to around $202-205 per 1,000 cubic metres in 2020.
What is more, Russia had initially hoped to get $25bn in prepayment for gas supplies from
Week 48 04•December•2019 w w w . N E W S B A S E . c o m P5