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December 19, 2019 No.
8422

Russian Media Outlet Vz.ru: What Is Preventing Russia And China From Launching A 'Power Of Siberia 2'

On December 2, Russia and China launched the cross-border natural gas pipeline "Power of Siberia" project. In May 2014, Gazprom signed a 30-year agreement with the China National Petroleum Corporation to supply Russian gas to China via the eastern route. The Power of Siberia gas pipeline has a capacity to deliver 38 billion cubic meters a year.[1]

A ceremonial event marking the beginning of first-ever supply by pipeline of Russian gas to China via the Power of Siberia gas pipeline took place on the same day.

As reported by the Gazprom website, the event's participants via conference included Vladimir Putin, President of the Russian Federation, Xi Jinping, President of the People's Republic of China, Alexey Miller, Chairman of the Gazprom Management Committee, and Wang Yilin, Chairman of the Board of Directors of CNPC.[2]

Gazprom reported: "The scheme of gas supplies via the eastern route is the most ambitious investment project in the global gas industry. Within this framework, Gazprom has built a section of the Power of Siberia gas pipeline stretching for some 2,200 kilometers from Yakutia to the Chinese border near Blagoveshchensk. Also completed are the border-adjacent Atamanskaya compressor station and a cross-border section with a two-string submerged crossing under the Amur River…

"In late 2022, Power of Siberia will start to receive gas from one more location – Kovyktinskoye (2.7 trillion cubic meters of gas reserves), the most prolific field in eastern Russia. At the moment, the field serves as the basis for creating the Irkutsk gas production center, with pre-development operations underway. In the future, an approximately 800-kilometer stretch of Power of Siberia will be constructed between Kovyktinskoye and Chayandinskoye."[3]

During the conference call, Putin said: "Nihau, good afternoon, hello… Today is a special day and a truly historic event, not only for the global energy market, but primarily for you and me – for Russia and China.

This year marks the 70th anniversary of the establishment of diplomatic relations, and this year we begin supplying Russian pipeline gas to China. This step takes Russian-Chinese strategic energy cooperation to a qualitatively new level, and brings us closer to the goal we set with President of China Xi Jinping to increase bilateral trade to $200 billion by 2024…

"For our country, for Russia, this project is important not just for export but also because it will deliver gas to the Amur Gas Processing Plant, which will become one of the most powerful in the world…"[4]

Chinese President Xi Jinping stated: "… This year marked the 70th anniversary of establishing diplomatic relations between China and Russia. President Putin and I have spoken about progress in China-Russia relations, and our comprehensive partnership and strategic cooperation, which are entering a new era. We agreed that promoting China-Russia relations will remain our countries’ foreign policy priorities. We will steadily work to expand strategic interaction and cooperation in a variety of areas…

"I would like to say a few words about management and maintenance requirements for the pipeline.

"The first priority is security and maintenance safety. The second priority is environmental friendliness…

"The third priority is the socioeconomic effect. The Chinese-Russian gas pipeline should facilitate the socioeconomic development of the regions across which it runs.

"The fourth priority is stronger friendship. We must coordinate the interests of our countries even closer in the spirit of mutual understanding and advantage.

"China and Russia are at a crucial stage in their national development, and our relations are entering a new phase as well. I hope that our countries will continue working to create even more landmark projects like the Chinese-Russian gas pipeline in the interests of our countries and to the benefit of our peoples…"[5]

During the ceremony, Alexey Miller, Chairman of the Gazprom Management Committee, also said: "Today, we are witnessing a historic event for Russia and China. The eastern route – Power of Siberia – is a global, strategically significant and mutually beneficial project. [It is] a new scope of energy cooperation between the two countries with a prospect for further development. [It means] clean energy today and tomorrow, for decades to come."[6]

The Russian media outlet Vz.ru interviewed Igor Yushkov, a leading expert of the National Energy Security Fund. Who – commenting on the "Power of Siberia" pipeline – stated that eastern route shows the West, which "accuses Russia of everything and constantly imposes sanctions," that Moscow is turning to the East. "It's the West who is pushing us into the arms of Beijing," Yushkov said.

However, Vz.ru also explained that the prospects for a 'Power of Siberia 2' gas pipeline are remote, since it will be more difficult to agree on the price of gas. Konstantin Simonov, director general of the National Energy Security Fund, assessed: "'In the area North of Beijing, to where the gas via the 'Power of Siberia' will come, there were no alternatives to Russian gas. And in the West of China, where gas must be supplied via the 'Power of Siberia 2', there is an alternative. Here, Russian gas competes with Central Asian gas, which is slightly cheaper than the prices of the European market."

Below is Vz.ru's article:[7]


Chayandinskoye field (Source: Gazprom.com)


Vladimir Putin and Alexander Novak, Minister of Energy of Russian Federation, during the conference call. (Source: Kremlin.ru)


Xi Jinping, President of People’s Republic of China, during the conference call. (Source: Gazprom.com)


Alexey Miller (center) during ceremonial event at Atamanskaya CS in Amur Region. (Source: (Gazprom.com)


Wang Yilin, Chairman of Board of Directors of CNPC, during conference call. (Source: Kremlin.ru)

 


Developing gas resources and shaping gas transmission system in Eastern Russia. (Source: Gazprom.com)

Energy Expert Yushkov: 'Moscow Is Turning To The East. It's The West Who Is Pushing Us Into The Arms Of Beijing'

"Six years after the signing of the sensational gas agreement with China [in 2014], Russia for the first time allowed its pipeline gas [to go] not to Europe, but to Asia. This event is of landmark importance [and] not only from a geopolitical point of view. What benefits will the new gas pipeline bring to Russia and China? And why haven’t they agreed so far on the second gas pipeline to China?

"Russian President Vladimir Putin and Chinese President Xi Jinping have kicked-off the commencement of Russian gas supply to China via the 'Power of Siberia' pipeline.

"Gas will flow from the Chayandinskoye [gas] field in Yakutia to Blagoveshchensk (on the border with China) over a 2200-km-long distance. In the second phase, a nearly 800 kilometers long pipeline will be opened from the Kovyktinskoye field in the Irkutsk region to Chayandinskoye field in Yakutia. Both fields are rich resources sites. Thus, the total length of the 'power of Siberia' is about 3000 kilometers. The construction of the pipeline took over five years, at an estimated cost of 1.1 trillion rubles.

"This project became possible thanks to the conclusion of a historic contract for the supply of gas to China via the Russian pipeline, the so-called Eastern route. It was signed by the two countries' top officials in May 2014.

"'This step brings the Russian-Chinese strategic cooperation in the energy sector to a qualitatively new level and brings us closer to the goal, a joint commitment with Chinese President Xi Jinping, to raise bilateral trade to 200 billion dollars by 2024,' said Vladimir Putin. The contract covers the supply of 38 billion cubic meters of gas per annum for 30 years at an amount of $400 billion.

"'The eastern branch of the Russian-Chinese gas pipeline is a landmark project of bilateral energy cooperation/ It provides an example of deep integration of mutually beneficial cooperation between our countries. The operation of the gas pipeline is the beginning of a new stage in our cooperation,' said Xi Jinping.

"'This is indeed a landmark event, which once again confirms the desire of our countries to unite in the face of the difficulties that arise in connection with the sanctions and trade wars with the United States. This is a long-awaited event for Russia and China,' says Nelly Semenova, senior researcher at the Department of Economic Research at the Institute of Oriental Studies of the Russian Academy of Sciences, and a member of the Russian Association for International Studies.

"'Few people remember that in May 2014 this contract with the Chinese became a sensation. No one believed it would have been signed, because negotiations on the 'Power of Siberia' had been going on for years, and then Putin went to China - and the contract was unexpectedly signed. This agreement was a demonstration that China, already cognizant of the Crimea annexation, signed a major economic deal with Russia. Russia needed to show, after the 'Crimean spring', that we did not remain in an economic isolation,' recalls Konstantin Simonov, director general of the National Energy Security Fund.

"'It is also a demonstration to the West, which accuses Russia of everything and constantly imposes sanctions that Moscow is turning to the East. It's the West who is pushing us into the arms of Beijing,' adds Igor Yushkov, a leading expert at the National Energy Security Fund.

"Without diminishing the crucial symbolic significance of the launching of this project, it is worth noting what practical advantages the new gas pipeline will bring to both Russia and China.

"Such large-scale infrastructure projects have already spurred the production of Russian pipes, gas compressor stations and various equipment, as well as provided work for metallurgists, miners, builders, engineers and repairmen. All this has brought additional contributions to regional budgets. Verily almost 10 thousand people and 4.5 thousand vehicles were involved in the construction. 130 thousand pipes of various diameters weighing more than 1.8 million tons were used, more than 260 thousand joints were welded, 10 crossings through large rivers and 100 crossings through rivers and swamps were built.

Russia Is Not Opening A New Market To The Detriment Of European Buyers Of Russian Gas

"Russia is getting access to a new market. We are already supplying LNG [liquefied natural gas] to China, but in small volumes. Now we are talking about an annual supply of 38 billion cubic meters of pipeline gas for 30 years. It works out that over one trillion cubic meters will be delivered during all this time.

"'We are entering into the fastest growing and most interesting market. Amidst the growth of the Chinese economy, coal is being replaced inter alia by gas. One can argue about how fast the demand for gas in China will continue to increase, but it is obvious that it will grow, because the share of gas in China’s energy balance is still very small,' assumes Simonov.

"'Gazprom will be able to significantly diversify the geography of its gas supplies and increase business stability: for example, in the event of price disputes with European consumers, the position of the Russian company will be much stronger,' said Narek Avakyan, Head of Investment Investments at BCS Broker.

"However, Russia is not opening a new market to the detriment of European buyers of Russian gas. 'We are not taking gas from Europe. It's not gas from Urengoy or Bovanenkovo [gas fields]. For China, we have opened a new resource site: It's the Yakut field and in the future we will launch the Irkutsk field,' Simonov said. Therefore, all statements, [claiming] that Russia is allegedly blackmailing Europe by starting supplies to China, are baseless. For gas supply to Europe and China, different resource zones are being utilized.

"Another important side effect of the construction of the main pipe is the gradual gasification of the regions of Eastern Siberia. 'This pipeline is important for the domestic consumption. Gazprom has big plans for the gasification of the Far East and of the Khabarovsk Territory. For our Far Eastern territories this will be of great help,' said Nelly Semenova.

"Thus, the main gas pipeline 'Power of Siberia' will provide gas for the Vostochny Cosmodrome, [...]. Already this year, the gas pipeline will supply gas to a station for gas distribution in the city of Tsiolkovsky. From this station an inter-settlement gas pipeline will be built, which will provide gas for the city boiler room and for the facilities of the Vostochny Cosmodrome. Later the Svobodny city will be gasified. In total, until 2026, Gazprom expects to gasify 38 thousand households and 33 boiler houses (the program has [already] been approved by the government of the Amur region).

"Moreover, thanks to the Power of Siberia gas pipeline, the Amur Gas Processing Plant is being built. The first complex of the plant will start operating in 2021, and the plant should be fully operational by 2025. 16 thousand people are involved in the construction of the plant, and when the enterprise will start working, three thousand new jobs will be created.

"'Russia will be able to further increase the production of helium and gas chemical derivatives. In the first years we will deliver absolutely everything that is in the pipe, but subsequently a gas processing plant will be built, which will produce ethane, propane, butane and other gases. In addition, 'SIBUR' [a Russian petrochemicals company] has promised to build a gas chemical plant. Therefore, in addition to gas, we will also have gas chemistry. We will not only meet the needs of our domestic market with our gas chemistry, but we will also export gas chemistry products to the Asian emerging markets," said Igor Yushkov, a leading expert of the national energy security Fund.

"For China, the delivery of Russian gas is important. Despite all the talk, Beijing continues to reduce the share of coal in its energy balance and switch to other energy sources.

"'For China, this project is beneficial because gas is delivered to an area North of Beijing, and this area was a gray spot for gas suppliers. To the West of China, gas comes from Central Asia, primarily from Turkmenistan and on the coast of China, which is served by LNG terminals, [gas] arrives as LNG. But in the area of Beijing and in the area North of Beijing gas is not available, there is only coal. Only Russian gas can get there at relatively affordable prices,' Konstantin Simonov explains.

"Secondly, a long-term contract with Russia and the 'Power of Siberia' gas pipeline will allow China to receive pipeline gas at a reasonable price and avoid the price spikes that are observed in the LNG market. Finally, Russia will ensure the reliability of gas supplies. 'These are direct gas deliveries without any transit countries and under a long-term contract. For China, Russia is a very predictable, stable and reliable gas supplier. No internal problems are visible in Russia, unlike in Turkmenistan, where it is not clear what is happening. The Turkmen economy is clearly not doing well and the proximity to Afghanistan does not improve the situation. This creates high risks of instability in gas supplies,' said Igor Yushkov.

Russian Gas Competes With The Central Asian Gas, Which Is Slightly Cheaper Than The Prices Of The European Market

"In the winter of 2018, Turkmenistan, which is the largest supplier of pipeline gas to China, had previously let Beijing down. At that time, it was unable to supply gas under the contract to China due to the growth of domestic consumption. Beijing had to urgently buy all the LNG on the market, which eventually led to a sharp increase in prices in Asia. And there are no guarantees that this will not recur because of Turkmenistan's fault.

"As for the LNG supplies that come from the south by sea, through the Strait of Malacca, this supply channel is also hardly reliable. 'In the Strait of Malacca there are always Americans who conduct military exercises with their fleet ostensibly against pirates, but everyone understands that [they intend] to be in control of the strait itself. LNG deliveries through this strait for China are becoming riskier as China’s relationship with the United States deteriorates,' said the gas expert [Igor Yushkov]. The U.S. Navy can take and block the Strait of Malacca, depriving China of LNG supplies. Of course, China will not pick Russia as the only supplier of gas, but it is makes sense [for China] to have [Russia] as a major supplier in order to increase its own energy security.

"There are disputes surrounding the economics of the new gas pipeline. Some experts say that the fact that Moscow is hiding the price of the Russian gas which was agreed upon with Beijing, means that [Russia] gave [China] a big discount; then this contract is unprofitable for Russia and that it was signed only for political reasons. However, the head of the NESF, Konstantin Simonov, assures that China has not received any discount. Gazprom noted that the agreement was concluded with a gas price which was on a parity with the European market. This means that the cost of pipeline deliveries of Russian gas to the Chinese market corresponds to the cost of deliveries to Europe.

"'Negotiations have been going on for a long time, but in the end we convinced China to [accept] the parity [of prices] with the European market. But since the gas price in the contract is tied to the oil price, in the end China received a market discount so to speak. Back in May 2014, the price of oil was simply higher than now. In 2014 we calculated that, the cost of gas for China was around 360 dollars per thousand cubic meters, and now it turns out that, according to our estimates, it's around 220-230 dollars per thousand cubic meters. China received this discount due to cheaper oil [prices] on the world market,' explains Konstantin Simonov. On the European market, the cost of Russian gas also fell from 350-400 to $ 200 per thousand cubic meters. The first gas deliveries and the first Customs statistics will shed more light on this commercial issue.

"Of course, the market price reduction could affect the payback period of the Russian project. However, to say that the pipe will never pay off its own costs is not really correct. 'The payback depends on how many years the object will be active. The Ukrainian pipeline has been functioning for 30 years, and it has paid off a dozen times. If we have an infrastructure and a market, then Russia gets an obvious competitive advantage. Moreover, LNG simply reaches an area of China where there is no other gas network', Simonov said.

"As for the ongoing negotiations on expanding supplies for the new 'Power of Siberia 2' gas pipeline, the price here is the main stumbling block. The signing of the first contract also took a long time. However, [here] the situation is different - it is more difficult to agree on the price [of gas] of the second contract. 'In the area North of Beijing, where the gas via the 'Power of Siberia' will arrive, there were no alternatives to Russian gas. And in the West of China, where gas must be supplied via the 'Power of Siberia 2', there is an alternative. Here, Russian gas competes with Central Asian gas, which is slightly cheaper than the prices of the European market. Hence the long debate,' explains the director general of the National Energy Security Fund [Simonov].

 


[1] Kremlin.ru, December 2, 2019.

[2]Gazprom.com, December 2, 2019.

[3] Gazprom.com, December 2, 2019.

[4] Kremlin.ru, December 2, 2019.

[5] Kremlin.ru, December 2, 2019.

[6] Gazprom.com, December 2, 2019.

[7] Vz.ru, December 3, 2019.