Arithmetic, an Enemy of Gazprom
Little is actually known about the terms of the May 21 contract between Gazprom and CNPC apart from its duration (30 years). The statement of Gazprom CEO Alexey Miller about the overall value of the contract totaling $400 billion must be treated as unrealistic: the price of Russian gas is indexed according to a sliding scale, as Gazprom announced well before the signing ceremony, and it is absolutely unknown what it is going to equal three decades from now.
What do we really know?
We can be sure it will cost Russia over $100 billion to develop the gas fields in Yakutia and Irkutsk Region and connect them with a crossing point on the Chinese border rather than $55 billion quoted by Vladimir Putin in Shanghai. The breakdown, as Gazprom economists told RusEnergy, is as follows:
Development of Chayanda and satellite fields in Yakutia (capable of producing 34 bln cubic meters a year) will cost at least $22 billion; development of Kovykta in the Irkutsk Region (needed to raise the annual flow to the announced 38 billion cubic meters) and a pipeline link to Chayanda will add $20-25 billion; a gas processing facility in Belogorsk (which will remove helium and other components from wellhead gas) will cost $15 billion. The initial version of pipeline is estimated to require $33 billion to be built, but a full-capacity transportation system will need a capex of $46 billion.
We also know that first gas from Russia can reach the Chinese border in 2020, the earliest, and the first annual volume will be just 4.5 billion cubic meters. To be able to export 38 billion a year, Gazprom will have to spend another ten years installing extra boosters on the pipeline and drilling new wells at the fields. It means the contract can begin to be carried out fully only after 2030.
What about the commercial viability of the Chinese contract? Gazprom planners estimated in their pre-feasibility study that the payback period would be in the range of 15.5 to 16.5 years, if calculated on the base of net profit, but a discounted net profit base produces a period of 30 years or, in some scenarios, ‘never at all.’
It is not a commercial project (just as Gazprom is basically not a commercial company but an instrument of Putin’s geopolitical initiatives.) The essential goal of the Russian government here is to create a new export outlet for natural gas, regardless of costs, because the EU market is not growing and European clients are determined to diversify their sources of energy supply. The Ukrainian events, followed by a crisis in Russia’s relations with the West, are a factor which has accelerated the strategic movement of Russia toward the Asian markets and alliances, but not the main incentive of the Kremlin in this policy.
Mikhail Krutikhin
Mikhail Krutikhin is with RusEnergy. an independent privately-run company established in 2000 by a group of Russian experts with a long experience in consulting and publishing business. Based in Moscow, it specializes in monitoring, analysis and consulting on oil and gas industry of Russia, Central Asia, Azerbaijan and Ukraine. RusEnergy is a Natural Gas Europe Media Partner