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For its part, China is keen to pipe gas to its northwest territories as they remain underdeveloped 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 construction 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 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 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 analysts pointing to Gazprom’s opaque mechanism of awarding contracts to construction companies owned by Kremlin insiders, the so-called stoligarchs, as the cause.
As bne IntelliNews reported, The gas firm is now seeking to buy out some of these companies. Gazprom will c lose a deal to buy 100% of the company's largest subcontractor Stroygazmontazh that did much of the work on the Power of Siberia, controlled by stoligarch Arkady Rotenberg for RUB70bn-95bn ($1.1bn-$1.5bn), according to reports by RBC business portal and Vedomosti d aily citing unnamed sources.
Power of Siberia will also take a considerably long time to ramp up to full capacity, reaching this point only in 2025. Gazprom is required to supply at least 5bcm of gas from the pipeline in 2020, 10bcm in 2021 and 15bcm in 2022 under its contract with CNPC, while the Chinese firm's minimum offtake is 85% of delivered volumes. How quickly supplies increase will depend on demand in China, as well as how cheaply the country can procure supplies from elsewhere, including LNG. At the same time the Chinese domestic gas distribution pipeline network needs to be developed as it has never had a northern supplier before and so much of the infrastructure has yet to be built.
“The launch is positive for the company, as it opens access to the fast-growing Chinese market, while exports to Europe are flat lining,” VTB said, estimating that Power of Siberia supplies would make up 14% of Gazprom’s overseas 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 customer 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, but new supply deals still need to be finalised.
At the same time, Gazprom is preparing to launch two more major pipeline projects in Europe – the Nord Stream 2 to Germany and the Turkish Stream (aka TurkStream) to Turkey – in order to scale back gas transit via Ukraine.
7 RUSSIA Country Report December 2019 www.intellinews.com
