By Rhod Mackenzie
The Russian Deputy Prime Minister Alexander Novak said that Russia in the coming years, with the help of China, will be able to win back, and in the future, even cover the losses incurred due to the fall in gas supplies to Europe. According to his estimates, gas pipeline exports by 2030 could reach 100 billion cubic meters. m, and taking into account liquefied natural gas - 170 billion cubic meters. m. How real are these plans ?
In a recent article in Energy Policy magazine the Deputy Prime Minister Alexander Novak, announced ambitious plans to increase Russian gas exports to the East to 170 billion cubic meters over the next seven years. . This is expected to be achieved through the implementation of large infrastructure projects - "Power of Siberia - 2" and the so-called Far Eastern route, which should be completed in addition to the already operating pipeline "Power of Siberia - 1".
“These gas transportation infrastructure development projects will make it possible to unite the entire gas transportation system of the country into a single network and create an opportunity for exporting up to 100 billion cubic meters of pipeline gas to the east. [per year],” Novak writes. In addition, it is expected that new liquefied natural gas (LNG) plants in Yamal will make it possible to ensure its production at the level of up to 100 million tons by 2030, and thus the total volume of gas exports to the East by 2030 will grow to 170 billion cubic meters. m, which is more than five times higher than in 2021, the Deputy Prime Minister claims.
In January, at a meeting between Prime Minister Mikhail Mishustin and the deputy prime ministers, Novak said that in 2022, pipeline gas exports to China had grown 1.5 times from the previous year, to 15.4 billion cubic meters. m, and LNG exports to China amounted to 6 million tons, an increase of 35.2%. This year, according to Novak, Russia should increase pipeline gas supplies to China by another 50%, to 22 billion cubic meters.
According to the International Energy Agency (IEA), despite the fact that the supply of Russian pipeline gas to Europe has already decreased by 90 billion cubic meters. m, this year, these supplies may be reduced by another 45%, or more than 35 billion cubic meters. Thus, at the expense of pipeline gas and LNG, by 2030 Russia plans not only to compensate for the dropped supplies to Europe, but also to surpass them by almost one and a half times.
Gas arithmetic
Currently, gas supplies from Russia to China are carried out via the Power of Siberia-1 pipeline, also called the Eastern Route, from the Siberian fields of Chayandinskoye (in Yakutia) and Kovykta (in the Irkutsk region). Its design capacity is 38 billion cubic meters. m with possible expansion. Full capacity is expected in 2027.
Russia and China have not yet agreed on the Power of Siberia-2 (Western Route) project through the territory of Mongolia with a design capacity of 50 billion cubic meters. In March, Novak said that Russia hopes to conclude a contract with China for supplies through this pipeline by the end of this year. In January 2022, Gazprom signed with Mongolia a report on the results of a feasibility study for the Soyuz Vostok gas pipeline project, which should become part of the Power of Siberia-2, connecting the Power of Siberia-1 with the Sakhalin-Khabarovsk-Vladivostok gas pipeline .
Recently, President Vladimir Putin signed a law ratifying an agreement between the Russian and Chinese governments on cooperation in the field of gas supplies through another pipeline - the "Far East route", sometimes called the "Power of Siberia - 3", with a capacity of 10 billion cubic meters. The resource base of the route will be the offshore fields of the Sakhalin-3 project.
These three projects together provide 98 billion cubic meters. m, almost the volume Novak writes about. Analysts polled by Forbes believe that not everything is going smoothly with these projects.
Forces of Siberia
The fundamental obstacle to the reorientation of pipeline gas exports from Europe to Asia is the fact that the Russian gas transmission system was initially focused on the European consumer, Alfa-Bank Senior Analyst Nikita Blokhin recalls: “Key production centers, currently concentrated in Yamal, were directly connected to existing export routes towards Europe. These are, in particular, the Yamal-Europe cross-border pipeline and the deep-water Nord Stream 1 and Nord Stream 2 pipelines. After sabotage on gas pipelines and blocking exports through Poland, Russia was left with a gas transportation system focused on deliveries in the western direction, while no one developed the eastern one.
Blokhin positively assesses the prospects for increasing the volume of supplies through the Power of Siberia - 1: “In my opinion, at the moment there are no significant risks of a decrease in the rate of loading of the gas pipeline, which beats a record for daily supplies every month,” the analyst believes. “According to our estimates, by mid-2025 the pipeline may reach its design capacity of more than 100,000 cubic meters. m per day, or 38 billion cubic meters. m per year. Independent analyst Yelena Anankina is more skeptical: “Will this project be able to reach its full capacity of 38 billion cubic meters? m by 2025, depends both on the fields where there were certain technical problems, and on the progress of construction of the Amur gas processing plant , whose readiness at the beginning of May 2023 was88.8% and which should take heavier fractions and helium from gas exported to China.”
According to the original plan, the Far Eastern Route is scheduled to be launched by 2025. But Aleksey Belogoryev, director of research and development at the Institute of Energy and Finance, doubts that this is feasible. “The reason is simple - a problem with the resource base on Sakhalin itself,” says the Forbes interlocutor. - Today, there are many who want to distribute Sakhalin's reserves in various ways - this is the gasification of the Khabarovsk Territory and Primorye, the production of LNG and, in fact, the supply of pipeline gas to China. I assume that deliveries along this route may begin, most likely, between 2026 and 2028. Although acceleration is possible.
Despite the fact that the governments of the two countries have ratified an intergovernmental agreement on the construction of a “Far Eastern route” for gas supplies to China, there is no understanding at this stage regarding the timing of the launch of this project, Blokhin adds: “Nevertheless, the very fact that the Chinese side signed a contract for the purchase of gas from Gazprom indicates that this project will be launched in the medium term.”
Mongolian trumpet
“The Power of Siberia-2” and, in particular, the Soyuz Vostok pipeline project through Mongolia involves the connection of a single gas transportation system with gas infrastructure in the Far East with access to gas export markets, in particular China, Nikita Blokhin argues: “In fact, before Gazprom has a responsible task: not just to lay a pipeline to the west of China, which needs export gas supplies much less than the coast of the Yellow and East China Seas, but to connect the export infrastructure within the country through the efforts of Chinese investors.”
At the same time, there are no political delays with the Mongolian route, says Blokhin. In his opinion, the government of Mongolia is no less interested than the Russian side in a project that will provide it with transit payments and cheap gas. “The issue lies rather in a different plane, namely, in agreeing on the final conditions for gas supplies with Chinese partners,” the analyst believes. “The Chinese are difficult negotiators, and in the conditions of a forced reorientation of volumes from the European export market, it will be quite difficult for Gazprom to get comfortable conditions for deliveries,” Blokhin believes. “Thus, according to Chinese customs statistics, Russian pipeline gas remains the cheapest for Chinese consumers compared to Central Asian export supplies.”
Aleksey Belogoriev from the Institute of Energy and Finance believes that the Power of Siberia-2 can be put into operation by 2030 at best, and will reach its design capacity closer to 2035: “The timing can move, but the project is very capital-intensive, and Based on the experience of the implementation of the “Power of Siberia - 1”, which was planned for a long time and built for five years, such a picture emerges.”
As one of the problems of the Power of Siberia - 2, Belogoriev names the low profitability of the project: “Investments in it pay off in the long term, but there is no comparison with exports to Europe. And the main problem of our entire turn to the East is connected precisely with the fact that we can replace supplies to Europe in physical volume, but we are not able, at least in the foreseeable future, to provide comparable supplies in value terms due to the unpreparedness of most Asian consumers , including China, to pay as much for gas as rich European countries could afford to pay in certain periods.
“As for the profitability of pipeline gas exports to China, no one has published official estimates, but by all indications it should be worse than that of European exports,” adds Elena Anankina. “The cost of gas production in Yamal is cheap, since all the fields have already been developed, but it will be necessary to pay for the construction of a multi-billion dollar pipeline, which is possible only if the pipe is loaded.”
“An alternative could be the active development of LNG production as a more flexible product that does not have problems with monopsony (a situation in the market when the monopoly position of the buyer allows him to dictate terms to many sellers. - Forbes),” Belogoriev believes. With all the disadvantages of LNG projects associated with high capital and transportation costs, the long-term return on LNG exports in terms of average gas sales prices is likely to be higher than all pipeline deliveries to China, the expert argues: “If we Consider a period of 10–15 years, then LNG supplies will almost certainly be more profitable for Russian companies and the Russian budget than pipeline gas exports, so, in my opinion, the strategic focus should be on LNG.”
Does China need Russian gas?
Today, China, according to Alkesey Belogoriev, is not particularly interested in accelerating the implementation of joint gas projects, in particular the Power of Siberia-2. “The Chinese leadership does not fully understand what will be the demand for gas in the country in the 2030s or even in the second half of the 2020s,” the expert says. - This is due, on the one hand, to the decarbonization policy, and on the other hand, to a rather strong turn in the past two years towards coal consumption, especially in power generation, and the acceleration of the development of renewable energy to the detriment of gas. Price swings in spot gas markets in 2021-2022 appear to have had a strong and long-term impact on gas demand in China. This effect is still poorly studied, because there is little data, but the fact that it did not go unnoticed for long-term demand, in my opinion, is obvious.”
Gas divorce: how Europe and Gazprom will do without each other
Whether China needs Russian gas in such quantities is an open question, Anankina agrees: “Economic growth should require more gas for energy and industry, but the spread of forecasts is very large, the share of gas in the energy balance is low, and the interest of the Chinese leadership in switching energy from coal to gas is weakening , concerns about energy security are growing. China has always sought to diversify its gas purchases, and even if Russian gas turns out to be cheaper than competitors, sanctions and political risks also have their price. It is absolutely not necessary for China to rush to sign a new long-term contract with Russia, because if Russia builds a pipeline, it will have nowhere to go. And after the visit of the Chinese leader to Russia, and after the St. Petersburg International Economic Forum, we have not yet heard any news about this long-awaited contract.”
According to Belogoryev, Russia can compensate for the loss of pipeline exports to Europe by increasing LNG exports and pipeline supplies to China only in the perspective of about 10 years, that is, in the early 2030s. “The main problem, a sore point, which is not talked about much, is the time factor,” notes the Forbes interlocutor. - Theoretically, it is possible to supply Russian pipeline gas to China in the volumes that are mentioned: through the "Power of Siberia - 1", "Far Eastern route" and "Power of Siberia - 2". But this does not solve the current problems associated with the formation of a huge surplus of production and transport capacities in the zone of the Unified Gas Supply System of Russia - a technological complex that includes gas production, processing, transportation, storage and distribution facilities in the European part of Russia and Western Siberia,
The export of pipeline gas to China is clearly not enough to replace the collapsed European gas market, neither in terms of volumes nor in profits, Elena Anankina is categorical. She recalls that historically Gazprom has exported 150-180 billion cubic meters to Europe (including Turkey). m, and in some successful years - even about 200 billion cubic meters. In 2023, only half of pipeline supplies through Ukraine and Blue Stream through Turkey remain, which together are unlikely to pass more than 60 billion cubic meters. m. “A new pipeline to China (“Power of Siberia - 2.” ) can add only 50 billion cubic meters. m, the new "Far Eastern route" - another 10 billion cubic meters. m. This is only 60 billion cubic meters. provided that both pipes are fully loaded, ”says Anankina.
This article orginally appeared in Russian at forbes.ru/biznes/