Page 5 - FSUOGM Week 22

FSUOGM COMMENTARY FSUOGM
recoverable gas reserves has already been revised downwards from 1.45 trillion cubic metres to 1.2 tcm. But according to Lenta.ru, the actual resources could be even smaller. Meanwhile, the planned number of wells has been cut from 335 to 278.
“The document shows numerous violations in the field’s development, condoned by the management of Gazprom,” Lenta.ru said, warn- ing that the entire project was “at risk of failure.”
Decisions on development were taken before the necessary geological exploration data had been obtained, Lenta.ru said, causing prob- lems at a later stage. The hasty planning was the result of fears that Russia would lose its place in the Chinese gas market to US LNG if it did not launch supplies on time, it claimed.
Drilling work is behind schedule and Gaz- prom’s drilling unit Gazprom Burenye has faced difficulties, partly because of problems using domestic technologies and equipment to replace imports. Russia launched an import substitution drive in 2014 aimed at boosting its manufactur- ing capability and safeguarding against potential stricter Western sanctions.
The production potential of Kovyktinskoye is also lower than initial estimates, Lenta.ru found. Gazprom assesses the field’s resources on its website at 2.7 tcm, but as was the case with Chayandinskoye, not enough exploration work has taken place to confirm this.
Lenta.ru estimates that the potential short- falls could cost Gazprom RUB1.5 trillion ($21bn). Figures for final investments in Power of Siberia and its two source fields vary, partly because of a lack of transparency. However, the Russian energy ministry gave a $55bn estimate for overall upstream and pipeline infrastructure
costs in 2014. Various reports of cost overruns have emerged since then.
Lavish spending
Given the lack of clarity about costs and the fact that Gazprom and CNPC have never disclosed their 2014 pricing agreement, it is impossible to say for sure how much of a return Power of Sibe- ria will make.
However, there is a general consensus among analysts that the project was more politically rather than commercially driven. Russia’s Sberbank CIB in 2018 described Power of Siberia and Gazprom’s other inter- national pipeline ventures as “deeply val- ue-destructive.” None of them are anywhere near a positive net present value (NPV), the investment bank said. Lenta.ru’s investigation seems to confirm this.
The revelations also come at a time when Gazprom is drawing up plans for a second, even larger pipeline to China via Mongolia. This pipe- line, dubbed Power of Siberia 2, will flow up to 50 bcm per year of gas from fields in both East- ern Siberia and the northern Yamal Peninsula, a region which currently ships almost all its gas to Europe.
Gazprom set its sights in 2008 on becoming the world’s first $1 trillion company. But instead, at its current share price it is only worth $65bn, versus over $300bn a decade ago. Besides current market conditions, analysts have put the blame on the company’s lavish spending habits. After a managerial shake-up last year, Gazprom has indicated it wants to be a leaner, more efficient company. But plans for a second Chinese pipe- line suggest it will struggle to keep spending in check. ™
Week 22 03•June•2020 w w w . N E W S B A S E . c o m P5