Page 5 - FSUOGM Week 48 2019

FSUOGM COMMENTARY FSUOGM
Power of Siberia pipe goes live
The pipeline will earn billions from gas sales to China over the decades, but how quickly can Gazprom recoup its $55bn investment
RUSSIA
RUSSIA’S Gazprom commissioned its flagship Power of Siberia gas pipeline project on Decem- ber 2, paving the way for the shipment of billions of dollars of Siberian gas to China each year.
The 3,000-km pipeline will carry gas from the Chayandinskoye and Kovytkinskoye gas fields in Eastern Siberia over at least three decades, flow- ing 38bn cubic metres of gas each year at maxi- mum 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 Presi- dent Vladimir Putin, who watched the launch via video link from Sochi. “This step takes Rus- so-Chinese strategic cooperation in energy to a qualitative new level and brings us closer to [ful- filling] the task, set together with Chinese leader Xi Jinping, of taking bilateral trade to $200 bil- lion by 2024.”
Russia relies on Europe for the vast bulk of its gas exports, with volumes totaling around 200bcm each year. But in recent years it has struggled with flat demand for gas on the con- tinent as well as rising competition from LNG. Gazprom was stung by a 45% drop in net prof- its in the third quarter, blaming the decline on lower exports to Europe and bearish prices. Power of Siberia will help diversify the compa- ny’s revenue base by opening a route for larges- cale 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.
The road to Power of Siberia’s completion was beset with difficulties, however. 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. 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.
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 custom- ers in Western Europe, which should come to around $202-205 per 1,000 cubic metres in 2020.
What is more, Russia had initially hoped on getting $25bn in prepayment for gas supplies from China to help pay for Power of Siberia’s construction, but these funds never arrived. Instead it was forced to cover the project’s entire $55bn cost internally.
The project’s budget was initially less than half this sum, but soon ballooned, with ana- lysts pointing to Gazprom’s award to opaque contracts to construction companies owned by Kremlin associates as the cause. The gas firm is now reportedly seeking to buy out some of these companies.
Power of Siberia will also take a considerably long time to ramp up to full capacity, reaching this point only in 2025. According to VTB, Gaz- prom is required to supply 5bcm of gas from the pipeline in 2019, 10bcm in 2020 and 15bcm in 2021 under its contract with Gazprom. CNPC’s minimum offtake is 85% of delivered volumes. How quickly supplies increase will depend on demand in China, as well as how cheaply it can procure alternative supplies such as LNG.
“The launch is positive for the company, as it opens access to the fast-growing Chinese mar- ket,whileexportstoEuropeareflatlining,”VTB Capital said, estimating that Power of Siberia supplies would make up 14% of Gazprom’s over- seas shipments by 2025.
China already buys Russian gas from the Yamal LNG project in northern Siberia. Once Power of Siberia is running at full capacity, it could become Russia’s second-biggest gas cus- tomer after Germany, which took 58.5bcm of Russian gas last year. Beijing and Moscow have discussed additional supplies via proposed pipelines through Russia’s Altai region and via Mongolia.
At the same time, Gazprom is preparing to launch two more major pipeline projects in Europe – the Nord Stream 2 to Germany and the TurkStream to Turkey – in order to scale back gas transit via Ukraine. TurkStream is slated for launch in January, while Nord Stream 2 is expected to come on stream later in 2020. Nord Stream 2 fell behind schedule because of Den- mark’s delay in issuing a construction permit, which was finally granted in October.™
Week 48 04•December•2019 w w w . N E W S B A S E . c o m P5