The US$400 billion (HK$3.1 trillion) 30-year Sino-Russian gas agreement inked last week by the two nation’s state-backed energy giants was hailed by analysts as a win-win deal, but some unknowns could affect the sharing of benefits and risks.
Absent from the announcement on May 21 was any reference to the possibility of joint development of the fields that would supply gas to northeast China. Upstream gas production is typically the most lucrative part of the energy supply chain.
Also left up in the air are details about payment terms.
“The [press] releases are silent on other deal covenants … which may yet emerge over time,” said Barclays in a research report. “China had been keen on upstream exploration and production in Russia … while Gazprom may be keen on pre-payment or credit, given generally elevated risk to its access to global credit markets posed by the Ukranian crisis, and also to partly fund the US$55 billion that Gazprom expects to spend on projects to feed this contract,” Barclays said.
These cover gas field development costs, construction costs of the proposed pipeline from the field to the Sino-Russian border and gas processing facilities.
Russian President Vladimir Putin last week said Russia will invest US$55 billion and China roughly US$20 billion in order to realise the contract. It is not known whether the US$20 billion to be spent by the Chinese side includes any upstream field development spending in addition to expenditure for building the Chinese side of the pipeline system.
According to Gavin Thompson, head of Asia gas research at London-based consultancy Wood Mackenzie, development of one of the fields that would supply northeast China called Chayandinskoye will be “difficult with complex geology relative to West Siberia [that supplies Europe].”
Alexander Medvedev, chief executive of Gazprom’s export unit Gazprom Export, was quoted by Reuters on Friday saying that China National Petroleum Corp – parent of listed PetroChina – has agreed to pre-pay US$25 billion for the gas, but added that details were under discussion.
The gas deal, sealed after more than 15 years of negotiations – mostly over price haggling – would diversify Russia’s gas markets and reduce its reliance on Europe which buys the vast majority of its gas exports.
It would also cut the mainland’s reliance on expensive imported liquefied natural gas (LNG) and give it a stronger bargaining position against LNG suppliers in the United States, Canada, Australia, Middle East and Asia, said Nomura head of regional energy research Gordon Kwan.
The mainland’s gas demand is projected by state economic planning agency National Development and Reform Commission to rise to 400 billion cubic metres by 2020 from 168 bcm last year.
The Sino-Russian gas pipeline would have an annual capacity to send 38 bcm of gas to northern China from as early as 2018, although analysts said there is risk of a delay in delivery given the scope of the gas fields’ development and infrastructure that needs to be built.
Russia’s gas exports to Europe first reached 38 bcm over three decades ago, primarily to Western Europe. This has since surged to over 150 bcm, serving both western and eastern Europe, according to Thompson at Wood Mackenzie.
“We anticipate overall [Russian] gas demand from China over the next two decades will grow more rapidly than that witnessed in Europe from the mid-1980s,” he said. Thompson projected that eight northern and northeast China provinces will be the main consumers of the gas to be imported from Russia.
With a population of 360 million – similar to that of Europe – the eight provinces’ combined gas demand will reach 125 bcm by 2025, over three times the initial supply volume from Russia, he estimated.
Source : South China Morning Post | May 27, 2014