Russia, China strike second gas deal
Russia's Gazprom announced on February 4 it had signed a second long-term gas supply deal with China's CNPC, underpinning the development of a second export route for gas produced in the Russian east.
The agreement covers the annual sale of 10bn m3/year of gas produced in the Far East over a 30-year period. It builds on a 2014 deal Gazprom and CNPC signed covering 38bn m3/yr of supplies via the Power of Siberia pipeline, which was opened in late 2019.
Gazprom CEO Alexei Miller said the new deal was "indicative of the exceptionally strong mutual trust and partnership between our countries and companies."
"Our Chinese partners from CNPC have already seen for themselves that Gazprom is a reliable gas supplier," he said.
While Power of Siberia flows gas produced onshore in east Siberia, supply for the new contract will come from the South-Kirinskoye, situated off the east coast of Sakhalin island. The gas will be delivered to China via the Sakhalin-Khabarovsk-Vladivostok pipeline.
Deliveries could begin in two or three years time, according to Reuters, and will reach a plateau rate by around 2026. Pricing terms will be similar to those agreed for supplies via Power of Siberia, sources told the news agency. The price of that gas was linked to oil, at what BCS GM estimates as an 8.5-9.0% slope at the Chinese-Russian border.
"Delivering gas to China's northeastern tip makes this project strategically attractive for China, as the only real alternative supply would be more expensive LNG," BCS GM analyst Ronald Smith said. "The global gas market is very much a seller's market today, so we expect Gazprom got pricing that is somewhat superior to [Power of Siberia supplies], perhaps with a 9-10% [slope]." This implies that if oil sells at $90/barrel, the gas will be priced at $300/'000 m3.
"There are no transit countries as with European deliveries, which usually requires $70/'000 m3 in transit charges. Therefore, the netbacks to Gazprom are quite competitive to typical European prices," Smith said.
The challenge will be developing the South Kirinskoye field, Smith said, given the project's complexity and the fact that it is subject to US sanctions introduced after Moscow's annexation of Crimea. These sanctions mean Gazprom cannot rely on Western technology.
"However, we think Gazprom is capable of developing the 637bn m3 of estimated gas reserves at the field," Smith said. Gazprom has previously estimated the field's plateau production capacity at 21bn m3/yr, which would be enough to easily meet the contract's requirements. The Sakhalin-Khabarovsk-Vladivostok pipeline is currently undergoing an expansion in its capacity to 13bn m3/yr, although Smith noted it could be increased to 30bn m3/yr if extra compressors are added and de-bottlenecking work undertaken.
South Kirinskoye's development and an increase in the Sakhalin-Khabarovsk-Vladivostok pipeline's capacity will strengthen the case for Gazprom's long-held plan to build a small-scale LNG plant in Vladivostok. Smith said the LNG project made "fantastic sense - being just around the corner from the three largest LNG consumers in the world."
Future deals
Gazprom is also negotiating a much larger deal for 50bn m3/yr of gas via a new pipeline it wants to build to China through Mongolia. BCS GM estimated that there was a 50% probability that this agreement might also be signed in the next 12 months, in light of recent progress. Gazprom finished a feasibility study on building the pipeline in late January, which would carry gas to China all the way from the Russian Arctic.
This will give Gazprom strategic options for gas from those fields other than for export to Europe, Smith said. But initially the flexibility that creates "will be more theoretical than actual, as Gazprom will be bound by contracts in both directions," he said. "However, it will definitely increase its negotiating power with Europe whenever contracts roll over."
Gazprom is also in separate talks to agree on the sale of an extra 6bn m3/yr of gas via Power of Siberia.