Gazprom pipeline to China looks far from profitable
Russia has started sending natural gas from Siberia through a multibillion-dollar pipeline into northeast China, but several analysts believe the project will not make a profit for a long time.
“All in all, the Power of Siberia is a big image-building stunt for Russia, but not a profitable commercial project, and it translates into a net loss for state-controlled Gazprom,” Mikhail Krutikhin, a co-founder and partner of RusEnergy, a Moscow-based independent analytical agency, said in a December opinion piece in Al Jazeera.
“The project is unprofitable, even though the (Russian) government has exempted it from the mineral extraction tax and property tax,” Krutikhin said.
Stunt or not, Gazprom reportedly is spending upwards of $55 billion for close to 2,000 miles of pipe and gas field development costs. It’s part of Russia’s turn toward building relationships — and energy sales — with China as it faces growing competition from renewables and U.S. LNG in Europe, its most profitable pipeline gas market,.
“The geo-economic leverage that comes with a new energy pipeline is also not lost on Russia,” Ariel Cohen, a senior fellow at the Atlantic Council, wrote in Forbes magazine in December.
Deliveries to China through the Power of Siberia line, which started up in early December, reportedly will average less than 200 million cubic feet per day during the first year, ramping up to full capacity of 3.6 billion cubic feet, or bcf, per day by 2025. That would represent more than 12 percent of China’s daily gas consumption last year.
China already is an investment partner and customer of Russia’s Arctic Yamal liquefied natural gas project, which started shipping gas two years before the Power of Siberia went into service as Russia’s first gas pipeline connection with its neighbor.
“In a nutshell, the Power of Siberia is a very costly window dressing … Until 2030, the Power of Siberia will not even pay off,” said Cohen, a founding principal of International Market Analysis, a Washington, D.C.-based global risk advisory firm.
Besides, Gazprom “likely underestimated the market risks of dealing” with a single, state-controlled buyer such as China, Cohen said.
Dmitry Marinchenko, lead analyst for oil and gas at Fitch Ratings, said the pipeline’s profitability will largely depend on the price China pays for the gas — a dynamic subject to the whims of global energy markets.
“Considering that oil and gas prices will likely remain relatively low for the foreseeable future, there is a high chance the project won’t pay off,” said Marinchenko, quoted in an Asia Times report Feb. 5.
“Strengthening relations with China and diversifying export routes are the main rationales behind Power of Siberia,” he said.
In addition, long-term gas supply for the pipeline is an issue, Krutikhin said.
The Chayanda field in Yakutia region, currently the only source of gas for the pipeline, can produce just two-thirds of what is needed to fill the line.
“To reach full capacity, Gazprom has to develop another large field, Kovykta, in the Irkutsk region some 500 miles south of Chayanda, and connect it to the Power of Siberia with another pipeline, which has not been built yet,” Krutikhin said.
Developing the Kovykta field could take a decade, he said.
Besides for needing more investment in Russian gas fields, China needs to spend more to extend the pipeline farther into its larger demand centers. Currently, the piped gas only reaches northeastern China, which does not need 3.6 bcf per day of gas.
Sending the gas into the industrialized Beijing-Tianjin-Hebei regions — much closer to LNG import terminals than Russian gas fields — would bring the pipeline gas into direct competition with seaborne cargoes, which have dropped to record low prices this winter in an oversupplied LNG market.
Krutikhin, like Cohen, believes Russia may have overestimated its ability to extract a higher price and a profit from its sales to China.
“Having a Chinese company as a single buyer of Russian gas at the far end of a very expensive pipeline is a big risk that erodes the possible commercial gains of the project,” Krutikhin said in his Al Jazeera piece.
When Gazprom and China National Petroleum Corp. signed the 30-year gas sales deal in 2014, Russia asked China to help finance the development. China declined.
“Because Russia will compete against other pipelines supplying gas to China, including from Turkmenistan and Myanmar, as well as against shipments of seaborne liquefied natural gas, China is in a favorable bargaining position,” Cohen said.
China was importing close to 5 bcf per day of pipeline gas, even before the Russian line started up.
The price China will pay for Russian gas still appears uncertain, or at least unknown outside the two countries.
“The details have not been disclosed,” but Russia is asking for prices comparable with what it charges in Europe, and China would prefer to pay less, Krutikhin told Japan’s Nikkei Asian Review in December.
Meanwhile, China holds another strong card at the negotiating table. Through its investment in Yamal LNG, Beijing is familiar with the cost structure of Russian gas operations. Sources told the Nikkei Asian Review that Beijing is leveraging what it has learned at Yamal in its pipeline gas price negotiations.
Russia holds the world’s largest gas reserves and earned almost $50 billion from gas exports in 2018, according to the Russian Central Bank. The country’s leadership is counting on strong growth in gas exports both for the revenues and geopolitical influence.
The significance of Power of Siberia beyond profits should not be underestimated, Sergey Kapitonov, gas analyst at the Energy Center of the Moscow School of Management Skolkovo, told the Asia Times this month. The project is a signal of increased energy cooperation between the two countries.
Gazprom already is talking with China about two more pipelines to connect Siberian gas fields with other parts of the country that stretches more than 3,200 miles across.
Larry Persily is a former Alaska journalist, state and federal official who has long tracked oil and gas markets and projects worldwide. He is the Atwood Chair of Journalism at the University of Alaska Anchorage School of Journalism and Public Communication.