/ world today news/ The opening of the Olympic Games in Beijing was marked by the signing of a new gas contract with China. It is about the Far Eastern route “Power of Siberia – 3”. A pipe can be quickly built here, but it still needs to be filled. How can Gazprom do this, bypassing US sanctions? And what are the prospects for the larger “Power of Siberia-2” project, which is still waiting for a contract to be signed?
Gazprom and the China National Petroleum Corporation (CNPC) signed a long-term contract for the sale and purchase of natural gas on the Far East route. Once the project reaches its full capacity, the volume of Russian pipeline gas supplies to China will increase by 10 billion cubic meters and will reach a total of 48 billion cubic meters per year, including supplies through the Power of Siberia-1 gas pipeline.
The Far East project is actually the third gas pipeline from Russia to China. The first project – “Power of Siberia – 1” – has already been completed. The historic 30-year contract was signed in 2014. The first-ever pipeline deliveries of Russian gas to China began in 2019. However, the pipeline has not yet reached its full capacity of 38 billion cubic meters of gas per year. The contract provides for a gradual increase in supplies.
The next stage was supposed to be the second project – the route “Power of Siberia – 2” (originally “Altai”). He transformed several times. The last decision – they decided to push this pipe through Mongolia. The Mongolian part of “Power of Siberia – 2” was called “Soyuz-Vostok”. Literally in January, the development of a feasibility study for this project was completed. It is about supplying up to 50 billion cubic meters of gas per year. But the contract with China for this project has not yet been signed. Initially, Russia considered this pipeline to China as promising and fundamental, but it is destined to become the last of the three realized projects.
“Power of Siberia-3” is the Far Eastern supply route, on which the contract was signed at the opening of the 2022 Olympic Games in Beijing. This contract is, of course, important for Gazprom and for the growth of Russian gas revenues. However, its scale is more modest than the sale of 50 billion cubic meters per year through the “Power of Siberia-2” through Mongolia. The Far East will be able to sell a maximum of 10 billion cubic meters.
“The signing of the second contract for the supply of Russian gas to China testifies to the highest level of mutual trust and partnership between our countries and companies. Our Chinese partners from KNPK have already managed to make sure that Gazprom is a reliable gas supplier,” says Gazprom CEO Alexey Miller.
Why was the contract signed for “Power of Siberia – 3” and not “Power of Siberia – 2”?
First, it is a short transportation route. Second, relatively little work is required to implement the project. The Sakhalin-Khabarovsk-Vladivostok gas pipeline already exists to provide Primorye with natural gas. From it, it will be enough to build a branch just a few tens of kilometers to the border with China,” says Igor Yushkov, an expert at the Financial University of the Government of the Russian Federation and the National Energy Security Fund. But where exactly will the pipe start and where will it end on Chinese territory is not yet clear. Thirdly, for the first stage of gas supplies on this route, Gazprom has a resource base in the form of the developed Kirin field. Currently, about 2 billion cubic meters are produced there to provide of Primorsky Krai with gas, but the volume of production can be increased to 5 billion cubic meters.
This will be enough to fill the pipe at first. Most likely, the contract envisages a gradual increase in the volume of supplies to a maximum of 10 billion cubic meters (the same scheme applies to “Power of Siberia-1”). But then Gazprom will have to start the development of the Yuzhno-Kirin field and build a second gas compressor station (to increase the pressure in the pipe and the throughput of the pipes). Only then will Gazprom be able to reach the full load of the Far East gas pipeline of 10 billion cubic meters. And here the difficulties begin.
“The development of the Yuzhno-Kirinsko deposit is planned through American autonomous underwater production blocks. In 2015, however, the Americans imposed sanctions specifically against this sphere. This is a unique case because both before and after the US imposed only sectoral sanctions and against companies, but not against specific areas. They managed to deliver American equipment to the Kirin deposit,” says Igor Yushkov.
In order to fulfill the already signed contract, Gazprom must start mining in the South Kirin field. But how to do this?
Signing a contract with China without knowing how to extract the contracted gas is quite a risky step. Therefore, most likely, “Gazprom” has found a solution to the problem after all. But it will take him some time. Perhaps it is no coincidence that the deadlines for the implementation of the new contract were not announced by either Moscow or Beijing. And it is likely that the supply volume will increase gradually.
There are several possible solutions to the problem of the development of the South Kirin deposit. “Gazprom could change the entire field development scheme by replacing the American equipment with something else, such as a surface production platform,” Yushkov argued. Or Russia has managed to create its own equipment for the production of underwater gas on the shelf. Or an alternative to American technology has been found in China.
“Perhaps this offshore field will be developed in cooperation with Chinese companies. Theoretically, Gazprom can create a joint venture with the Chinese. The only catch is that the Chinese company will not be able to get a significant stake in the joint venture. By law, offshore mining can only be carried out by experienced companies in which the state has a controlling stake (51%). The state owns just over 60% of Gazprom. Therefore, it will be able to sell a very small share in a joint venture for the development of the shelf to a foreign company, conditionally it is 10%. The Chinese may not agree with this,” the expert explains.
If Gazprom succeeds in developing the South Kirin field, there will be no need to worry about refueling the Power of Siberia-3 gas pipeline in the Far East. In addition, the production potential is over 10 billion cubic meters per year and should reach 21 billion cubic meters per year at its peak. “The remaining gas can be supplied for the third stage of Sakhalin-2, or return to the LNG project in Vladivostok, or we can agree on additional volumes of supplies to China,” says Yushkov.
China was initially interested in this project, which does not require large investments in construction, including from its side. In addition, the gas comes to the northeastern part of China, where there are no other gas suppliers. The LNG terminal is far from this region, and there is no Central Asian pipeline gas here.
The Power of Siberia-2 project through Mongolia to China is much larger and requires significant time and money. But the main subtlety with him is to agree on the price of gas.
China is predictably trying to keep the price low. There were expectations that this very contract could be signed at the Olympic Games in Beijing. After all, China in 2021 is also facing a gas shortage, so it needs large volumes. However, the expert does not believe that the time has come for this contract. His signing was rumored back in 2016, but neither then nor now have they become a reality. According to Yushkov, the parties have not yet settled the price issue, and such a significant contract is worth signing outside the Olympics.
Meanwhile, Turkmenistan announced its readiness to reach an agreement with Beijing on the construction of a fourth route of the pipeline to deliver an additional 30 billion cubic meters of gas annually to the country. Now about 40 billion cubic meters of gas are already being exported through three lines of the Turkmenistan-Uzbekistan-Kazakhstan-China gas pipeline.
Central Asian pipeline gas is a direct competitor to Russian pipeline supplies to China. This is an old project of Turkmenistan, but it did not find support from the Chinese partner. “China does not agree with a fourth pipeline from Turkmenistan because it is trying to put eggs in different baskets. Beijing does not want to be too dependent on Central Asian gas,” says Yushkov. Russia currently supplies half as much to China via pipeline as Turkmenistan. In 2021, 15 billion cubic meters came from Russia to China and 34 billion cubic meters from Turkmenistan. In addition, Turkmen gas is located in a troubled region where something can “explode” at any moment.
Translation: V. Sergeev
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