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Gazprom chases China gas expansion

Now the Power of Siberia is operational, the Russian major is exploring additional pipeline options

Gazprom is pushing ahead with plans to ramp up its gas exports to China, seemingly undeterred by the market chaos created by the Covid-19 pandemic and a near one-fifth slump in its profits.

The Russian gas giant began pumping gas to China in December, after launching its 38bn m³/yr Power of Siberia (PoS) pipeline. Work continues at the Chayandinskoye field, where PoS sources its gas, in order to raise its production to a plateau rate of 25bn m³/yr, Gazprom reported in mid-April. The company expects to reach this target in 2022-23.

Chayandinskoye was placed under quarantine on April 17, according to local authorities. While Gazprom says production is unaffected by the lockdown, it has declined to comment on the impact on development work. But with almost 100 workers now hospitalised, a disruption seems probable.

Production drilling is also in “full swing” at the Kovyktinskoye field, which will start contributing to PoS’ flow by the end of 2022 and also produce 25bn m³/yr at full capacity. Seven rigs are stationed at the field, and this is set to increase to 18 next year.

Gazprom plans to break ground in the third quarter on a pipeline section linking Kovyktinskoye and Chayandinskoye, and also commission another PoS compressor station this year. PoS is expected to take until 2025 to ramp up to full capacity, having flowed a mere 840mn m³ of gas by the start of March.

Russia’s Sberbank CIB describes PoS and Gazprom’s other international pipeline ventures as “deeply value-destructive”

The St. Petersburg-based company is also moving forward with a plan to build a second, larger pipeline to China via Mongolia, capable of flowing 50bn m³/yr. Russian President Vladimir Putin gave Gazprom CEO Alexei Miller the order to begin the project’s pre-investment phase, involving a feasibility study, designs and surveying work, during a meeting in late March.

Setting current market conditions aside, Gazprom is bullish on China’s long-term import trajectory. This is perhaps unsurprising given recent projections by a Chinese NOC. CNPC forecast, in its 2050 outlook published in August, that the country’s gas demand would double from 304bn m³ in 2019 to 610bn m³ in 2035, rising to 690bn m³ by 2050. Domestic supply will lag behind substantially, rising from 173bn m³ in 2019 to 300bn m³ in 2035 and 350bn m³ in 2050.

Growing supply gap

China is likely to increase its intake of Central Asian gas by 30bn m³/yr within the next decade, assuming it pushes ahead with Line D of the Central Asia-China pipeline. Besides this, its only options for meeting the growing supply gap are more LNG and/or Russian gas.

While the Chinese market might accommodate a second Russian pipe, it is debatable how feasible the plan is, just as it is difficult to gauge the return PoS will make on its $55bn cost. This is largely because Gazprom and CNPC have never disclosed their 2014 pricing agreement.

However, Russia’s Sberbank CIB describes PoS and Gazprom’s other international pipeline ventures as “deeply value-destructive” in 2018. None of them are anywhere near positive net present value (NPV), the investment bank claims.

Furthermore, it could take years for Russia and China to hash out a supply contract to underpin the Mongolian pipeline’s construction. After all, the 2014 deal for PoS was over a decade in the making.

Pursuing the project also raises concerns about whether Gazprom will make good on its plan to keep spending in check, after several years of record capex spent building PoS and other pipelines.

In the short term at least, Gazprom will need to keep spending in check, following the gas price collapse. It told investors in February it would lower investment this year to RUB1.1tn ($15bn), from RUB1.3tn in 2019.

During the same presentation it projected it would sell its gas in Europe at $175-185/ ‘000 m³. But the wholesale May contract at the TTF gas hub in the Netherlands closed on April 28 at €6.075 ($6.59)/MWh, equating to c.$68/’000 m³. Given the lockdown-related demand destruction in Europe, Gazprom looks set to suffer in terms of pricing and volumes, making a capex revision more likely.

The company published its 2019 results on 29 April, reporting a 17pc slump in net profits to RUB1.2tn. Revenues were down 6.8pc at RUB7.66tn, on weaker gas prices and lower sales volumes. Gazprom told investors in a conference call later that day that it would be making a revision to capex, would delay some projects and would finalise its new budget before mid-year.

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