China Will Not Provide Much Relief to Russia Before 2024, Says Report
Cooperation with China is only a “medium-term prospect” for Russia, whose production is affected by looming production challenges, declining CIS markets, weak domestic and stagnant European demand, says a report by CEDIGAZ released on Thursday, explaining that the deals with China are not expected to ‘provide much relief before 2024.’
Despite the new analysis, the relationship with China could easily change form. Especially in case Moscow further suffered adverse market conditions and Western sanctions, a new form of cooperation could be around the corner - Russia could give Beijing the kind of reward it refused to give to Western players for years.
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‘Mounting competition by independent producers and the development of new production by Gazprom, combined with stagnating domestic demand and weakening export markets, have created a situation of overproduction, made worse by western sanctions and low oil and gas prices’ reads the note released a few days after a provisional agreement of six world powers and Iran on Teheran’s nuclear program.
The main point here is that traditional “Western” markets are a source of uncertainty for Gazprom. In this sense, Russia’s focus on Asian markets is somehow necessary, but not easy. According to the international association dedicated to natural gas information, this process will not come without hurdles, as the success of Moscow’s strategy also depends on its ability to build new expensive pipelines to China.
‘The role of the Asia-Pacific market in the medium term will remain low until new pipeline supplies to China start at full scale. Russia is eyeing multiple options for gas exports via LNG and pipelines and total Eastern exports could reach 55-85 bcm/yr’ CEDIGAZ said on in its latest publication, arguing that the Russian gas industry has shown strong resistance to any form of structural overhaul, and it will stick to its guns rather than embrace market liberalisation.
Recent developments seem to prove the report right. When it comes down to a strong politicisation of the Russian oil and gas market, there is really little doubt - Moscow plays its strengths in its own way, not following merely financially considerations.
Over the last hours, for example, Gazprom confirmed its strong political role, approving additional 75 million euro for South Stream Transport B.V., which is the company originally conceived to bring gas from Anapa (Russia) to Varna (Bulgaria) through the “withdrawn” South Stream project. A few hours before Gazprom's decision, the company led by Alexey Miller named the Director General of Gazprom Russkaya, the wholly-owned subsidiary created to build the offshore gas pipeline connecting Russia and Turkey via the Black Sea.
From a financial standpoint, it is difficult to find a coherence in the two decisions. In this sense, CEDIGAZ is right when it say that “the (Russian) industry will likely remain under close state monitoring.” Gas is all about politics, and it will be even more so in case of extreme geopolitical confrontations.
THE RELATION WITH CHINA NOW
According to Reuters, Russia is switching its focus from the Power of Siberia pipeline, whose price ranges between $55-billion and $100 billion according to the estimates, to the cheaper Altai project. The main issue here is where and how to find money to finance these projects. In its report, CEDIGAZ agrees on the financial difficulties related to the new pipeline from Russia to China.
‘The transportation network will need huge investment with the development of the “Turkish Stream” and “Power of Siberia”. LNG projects are likely to face significant delays, due to high costs, geopolitics and financial sanctions, but could eventually develop on a significant scale in the next decade’ CEDIGAZ wrote, adding that production has now to move from the highly productive but maturing fields to new production coming from Yamal, Eastern Siberia/Yakutia and the Far East.
Despite the costs, Gazprom is trying to stave off communications discrediting its ability to deliver projects on time. The main Russian gas producer claimed that seismic survey operations in Yakutia are proceeding at full swing with innovative technologies and a significant deployment of experts.
Similarly, on March 19, Miller tried to dispel any doubt about the project. After a meeting with Yegor Borisov, Head of the Republic of Sakha, Miller said that “operations at Chayanda and Power of Siberia are in full swing and will be completed right on time.”
The strong communication approach and the great attention to the Power of Siberia prove that this is a key project for Moscow. If it wants to increase its Asian presence, Gazprom has to please its Chinese partners.
Beijing prefers the Power of Siberia pipeline, as it would connect eastern Russian fields to the Chinese coast, which relies on coal-fired power stations and has a bad reputation for its air pollution.
According to Mikhail Krutikhin, a partner of consultancy company RusEnergy, the project is not commercial, but viable. “The Russian government can go ahead with that because it’s political” he told Natural Gas Europe.
The contract signed between Russia and China last year envisages gas deliveries to China by 2019.
Recently, China's Foreign Minister Wang Yi said that Moscow and Beijing will sign an agreement on Altai pipeline by the end of the year. This will probably depend on the Power of Siberia - if Gazprom wants a new project, it needs to proceed on time.
THE RELATION WITH CHINA IN THE FUTURE
As said, Russian approach to energy sources will remain politically-based at least in the medium term. And here lies the potentials for further steps towards China. If Beijing’s economic interests converge to Russia’s political aspirations in a moment of strong tensions with the United States, Russia could do something even more extraordinary than come up with uneconomical projects.
Cooperation between Russia and China could extend to more encompassing forms, as the sale of a 10% stake in Vankorneft to China National Petroleum Corporation in November 2014 clearly suggest. Vankorneft is a Rosneft’s subsidiary that is developing a field in Eastern Siberia.
That is exactly the point.
Moscow has been traditionally reluctant to offer stake in strategic onshore deposits to non-Russian companies. But it did so just some months ago. If the cooperation fits well with Russian geopolitical aspirations, Russian President Vladimir Putin could easily accept significant Chinese economic interests in his motherland.
This compromise would allow Russia to deliver its Asian projects on time, and decrease its exposure to Europe. Nonetheless, that would come at a high price: Russian “independence” would be under threat by its hefty neighbour. That’s why CEDIGAZ is definitely right when it concludes that ‘the coming decade will be critical for the [Russian] industry.”
Sergio Matalucci
Sergio Matalucci is an Associate Partner at Natural Gas Europe. Follow him on Twitter: @SergioMatalucci