China is 'Gazprom's new Europe'

Market maker: China deal to unlock huge market for Russian gas

Gazprom’s long-term supply deal with China unlocks a vast new market that could replicate the Russian gas giant’s expansion in Europe at an even faster pace, energy advisors WoodMacKenzie said.

The Russian gas giant and China National Petroleum Corporation agreed on Wednesday for Gazprom to supply 38 billion cubic metres per year of gas under a 30-year deal valued at more than $400 billion.

Russia also committed $55 billion to developing upstream giant gas projects in East Siberia and building the eastern Power of Siberia pipeline across Siberia to Vladivostok near the Chinese border.

Wood Mackenzie head of Asia gas research Gavin Thompson said the deal had clear parallels with Gazprom’s Europe exports, pointing out that north-east China and western Europe held similar population sizes.

“Gazprom’s exports to Western Europe first reached 38 bcm by the mid-1980s and have since increased to over 150 bcm into the whole of Europe. We anticipate overall gas demand from China over the next two decades will grow more rapidly than that witnessed in Europe from the mid-1980s,” Thompson said.

Wood Mackenzie global gas research analyst Stephen O’Rourke said the pact with CNPC provided a vital new market for Gazprom at an uncertain time for its European gas demand.

“The agreement not only establishes a new gas production centre in East Siberia for Gazprom but provides the company with pipe export growth and market diversity away from its legacy European customers,” O’Rourke said.

China’s populous north-east experiences severe winters and has a shortage of indigenous supply options as demand continues to rise to an expected 125 bcm by 2025, Woodmackenzie said.

“Without East Siberian gas, alternative supplies would have to be sourced requiring significant additional infrastructure and cost. It would also deprive eastern coastal markets of supply, forcing an increased reliance on imported liquefied natural gas,” the energy advisors said.

For Gazprom, the Power of Siberia pipeline will offer opportunities to pursue additional export projects to more Asian buyers.

The deal could also open up the Chinese market for Russian independents if additional volumes are needed while Gazprom’s east Siberian giant fields Chayandinskoye and Kovytinskoye are still ramping up, the analysis said.

Field developments to serve the deal will be costly and technically challenging, Wood Mackenzie added however, given the Chayandinskoye field’s complex geology relative to West Siberia and its helium-rich gas.

“The overall cost for the Chayandinskoye upstream development, Power of Siberia pipeline and processing costs could exceed US$40 billion. This makes it one of the largest oil and gas investment decisions of the year globally,” the energy advisors said.

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