Can Gazprom deliver Power of Siberia gas to China by 2020?
In July, Gazprom and China National Petroleum Corporation (CNPC) announced first gas supplies via the Power of Siberia pipeline for 20 December 2019. The 38-bcm project is costly, with estimated total investment of almost US$60 billion, including upstream spend. Originally, Gazprom expected a US$25 billion prepayment from CNPC for pipeline construction.
However, this arrangement was later cancelled, and the pipeline is now solely financed by Gazprom. The raft of other projects starting up between 2019 and 2021, tax increases and low gas prices are putting a strain on the company's finances, creating risks for the Power of Siberia.
The project spend is not the only difficulty for Gazprom. The Russian fields planned to supply volumes into China are technically challenging and in remote locations. At around 3,000 km, Power of Siberia will be one of the longest pipelines ever constructed.
Ongoing work must be accelerated if the announced start date is to be met. Any delays to the pipeline will be welcome news to LNG suppliers, which are eager to sell gas to China.
Meanwhile, the market case for CNPC is also difficult. China will need Russian gas eventually, but starting early in the previously agreed 2019-2021 window isn't backed by fundamentals.
Domestic gas is performing well. LNG is expected to be abundant and cheap. Russian gas will need to be cost-competitive with its alternatives. Complicating matters, China is in the process of liberalising its gas market. Increasing competition could make marketing Power of Siberia volumes to end users more challenging for CNPC.
Still, it remains an important deal. It consolidates Russia's pivot towards Asia and constitutes an integral part of China’s Belt and Road initiative. However, continued political support will be necessary, if the project is to deliver at the agreed time.
- Upstream developments, pipeline route and associated storage facilities
- Gazprom's capex commitments on infrastructure
- The competitiveness of Russian gas compared with Chinese domestic supply
- Potential impact of Russian gas on China's LNG imports.