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Russia’s hunger for second eastern gas outlet grows

China’s rampant gas growth revives talk in Russia of Power of Siberia 2 pipeline project

Policy-driven gas demand is growing so fast in China that production and imports are struggling to keep up. The squeeze will ease when Russia's almost-complete Power of Siberia pipeline starts up, but bullish forecasts have reignited interest in a second Russia-China pipeline.

Towards the end of this year, on 20 December, Russian and Chinese dignitaries will gather to celebrate the start-up of the Power of Siberia pipelinethe centrepiece of a $55bn natural gas development programme that will eventually deliver 38bn cm/yr of Russian gas to the world's fastest-growing market.

The date was agreed back in July 2017 by Gazprom and China National Petroleum Corporation (CNPC), signalling their determination to implement in timely fashion a project of major importance to both countries.

An ambition fulfilled

Russia has long depended on pipeline exports westwards to Europe for its gas revenues and craved the creation of new pipeline gas markets in Asia. As long ago as the mid-1990s, the then head of Gazprom, Rem Vyakhirev, was proclaiming the newly-formed company's eastwards ambitions. A quarter of a century later, it will be on Alexey Miller's watch that these ambitions are fulfilled.

The Power of Siberia project, the backbone of Gazprom's Eastern Gas Programme, is an immense undertaking-Russia's largest energy project since the fall of the Soviet Union.

Along with the 3,000km pipeline that runs from gasfields in eastern Siberia to the city of Blagoveshchensk on the border with north-eastern Chinathe so-called "eastern route"the scope involves the development of two huge gas resources: the 1.4tr-cm Chayandinskoye field in Yakutia and the 2.7tr-cm Kovyktinskoye field in Irkutsk. Close to the border with China , Gazprom is constructing what will be the largest gas-processing plant in Russia, the Amur plant, which will have processing capacity of 42bn cm/yr.

Gas will be delivered under the terms of Russia's largest-ever sales and purchase agreement, signed by Gazprom and CNPC in May 2014. Specifying the supply of 38bn cm/yr over a period of 30 years, it was considered at the time to be worth $400bn.

Blue-sky thinking

For China, the start-up of the Power of Siberia pipeline cannot happen too soon. Since President Xi Jinping assumed office in 2013, the nation has been vigorously implementing policies to ease the appalling air pollution in its cities and, more recently, to keep to its climate change action pledges under the 2015 Paris Agreement.

At the heart of these policies is a switch from coal to natural gas, in heating and electricity generation.

In the winter of 2017/18, over-enthusiastic implementation of these policies led to severe, widely publicised gas shortages, as demand growth overwhelmed supply and delivery infrastructure. Lessons were learned but the implementation of coal-to-gas switching policies continues apace.

"If you come to Beijing often, you will see that these days the sky is clear, the air quality is good, kindergarten children no longer have to stay in the classroom and are able to go out for sports," says Yanyan Zhu, general manager of the trading department at Cnooc.

"The blue sky is something the whole nation wants and will never give back. So, in my opinion, the coal-to-gas policy will continue in the long run, which means gas consumption will grow."

Hungry for gas

The impact on the nation's demand for natural gas has been astonishingand unprecedented. Consumption in 2017 was 240bn cm, up from 195bn cm in 2015, a rise of 23%.

Imports have skyrocketed. According to customs data, LNG imports doubled between 2015 and 2017, to 38mn t. Moreover, imports during the first 11 months of 2018 were 44% up on the same period in 2017. If that growth rate continues into December, imports in 2018 will reach 55mn t (75bn cm).

Pipeline gas imports more than doubled between 2015 and 2017, to 42bn cm. Imports during the first 11 months of 2018 were up 22% on the same period in 2017. If that growth rate continues into December, imports in 2018 will reach 51bn cm.

With combined imports set to reach 126bn cm, it is no surprise that the International Energy Agency (IEA) is forecasting China will become the world's largest importer of natural gas in 2019.

China imports pipeline gas from Turkmenistan, Uzbekistan and Kazakhstan through the three strands (A, B and C) of the Central Asia-China Gas Pipeline. However, these three lines are approaching capacity and construction of a fourth strand, Line D, has been postponed indefinitely. Smaller volumes are imported via a pipeline from Myanmar.

So, start-up of the Power Siberia pipeline will bring welcome relief, though ramp-up will be gradual, partly because China is still working on the construction of the pipeline network that will distribute Russian gas to markets within the country.

Power of Siberia 2

Gas demand is expected to continue growing strongly over the long term. Projections by the Development Research Centre of the State Council indicate that, in a medium-case scenario, consumption will more than double over the decade from 2015 to 2025, from 194bn cm to 425bn cm, a rise of 119%, equivalent to a compound average annual growth rate of 8.2%.

The IEA's latest five-year gas market forecast sees consumption rising by 8%/yr between now and 2023, with imports rising to 171bn cm in 2023.

There is a perception, says Cnooc's Yanyan, that pipeline gas ought to be cheaper than LNG and that domestic production ought to be cheaper than pipeline gas. However, indigenous conventional production is expected to show only moderate growth, and shale-gas development is still in its infancy, so China is keen to expand pipeline gas importsand the most obvious source is Russia.

During the years of protracted negotiations that led to the 2014 agreement for Power of Siberia gas, Russia and China were discussing two possible routes: the eastern route now under construction; and a "western route" that would bring gas from fields in western Siberia into China via the short stretch of border that exists between Kazakhstan and Mongolia.

China argued strongly for the eastern route, because the entry point is close to large demand centres, notably around the cities of Beijing and Tianjin, and eventually got its way. However, discussions continued for deliveries via the western route-also known as Power of Siberia 2, or the Altai pipeline-and a heads of agreement for 30bn cm/yr of gas was signed in 2015.

For a while after that, the Power of Siberia 2 concept seemed to be making little headway and stopped appearing on some of Gazprom's maps. Last year was something of a turning point. With completion of the first Power of Siberia pipeline in sight, and the scale of China's gas demand growth becoming ever more apparent, the concept seems to be enjoying a revival.

Many obstacles remain

"Intensification of negotiations on the western route" was an agenda item at a meeting between Alexey Miller and Han Zheng, vice-premier of China's State Council, that took place in Moscow in September last year.

In the same month, Power of Siberia 2 was a topic for discussion at the Vladivostok Eastern Economic Forum, an annual conference established by President Vladimir Putin, and attended for the first time by Xi Jinping.

At best, a fully-fledged agreement on Power of Siberia 2 remains years away, given the various obstacles that would first have to be cleared away.

For example, the proposed pipeline route goes through mountainous territory, some of which consists of UNESCO world heritage sites. There have been suggestions that the pipeline might be routed instead through Mongolia, but this would require negotiations on issues such as transit fees.

From China's viewpoint, gas would be entering the country through the eastern province of Xinjiang, a long way from major demand centres, and would require an increase in the capacity of the West East Pipeline system that already carries pipeline gas from Central Asia.

None of these challenges are insuperable. So, it is conceivable that at some point in the 2020s, Russia could become China's largest gas supplier, exporting up to 68bn cm/yr.

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