Gaps to be filled in jumbo Sino-Russian gas deal

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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

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About thomasdinnocenzi

Thomas D'Innocenzi is a highly accomplished, results-focused senior international executive with extensive experience in global sourcing and market development worldwide to meet evolving business needs. Tom has proven ability in implementing and managing profitable global sourcing operations worldwide. Extensive experience in international market development operations to accommodate rapid growth. Skilled in building top-performing teams, benchmarking performance, and restricting organizations to improve efficiency, productivity, and profitability. Experienced transition leader and change agent. As principal of Nova Advisors, LLC I’ve assembled an exemplary team that brings with them the knowledge and experience gained from starting up a Global Sourcing program with multiple Fortune 500 companies as well as the largest supplier network throughout the Asia-Pacific region. We have experience and expertise in more than a thousand medical and pharmaceutical products in manufacturing and sourcing at the best value. The right product, the right price point and the right branding fueled these successes that resulted in double-digit growth for top line sales and bottom line net margins for our customers. What sets us apart: • Our reach includes a large network of suppliers & manufacturers spanning 13 countries in Asia-Pacific region • We understand the manufacturing process and the business of the supplier and the buyer • Our company culture is based on quality assurance and our process is based on local quality control Our commitment is to be your partner offering the best products and services at the lowest cost. Contact me to discuss how we can make the global marketplace work for you. thomas@novaadvisors.com In addition, I am open to discussing opportunities in global sourcing, international marketing & sales, logistics and medical/pharma in Thailand, Vietnam, Malaysia, Philippines & Japan. Aside from my work I enjoy piano, astronomy, physics, and assisting my daughters with their studies. SPECIALTIES: Global Sourcing, Supply Chain Management, Business Development, Marketing, Logistics, Global Networking, Market Development, Healthcare Solutions, Pharmaceuticals, Medical Devices, Technology, Asia, Southeast Asia, US and Canada
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