A Look at Gazprom's 'Impossible Promises' to China
Mikhail Krutikhin: Awkward arithmetic
Jokers in Gazprom say that, when Chairman Alexey Miller retires, the company may dedicate a memorial library in his name, and the bookshelves could be impressively stuffed with copies of agreements on gas supply to China.
Another such document was added to the collection during the G20 meeting in St. Petersburg in early September. In the presence of presidents Vladimir Putin and Xi Jinping Gazprom and CNPC signed ‘basic terms’ of delivering Russian natural gas across the Chinese border. The parties announced again that the new agreement opened the way to a final contract, to be signed before the year is over.
Gazprom spokesman Sergei Kupriyanov told reporters the deliveries would begin in 2015 and added that the 30-year contract was to be signed for annual supply of 38 billion cubic meters. Initially, he added, gas would reach China via the Sakhalin-Khabarovsk-Vladivostok pipeline until new lines were built from Eastern Siberia.
It sounds incredible whichever part of the statement you look at. Gas from Sakhalin? In 2015? 38 bcm? If upstream efforts of Gazprom on that island go on as planned, its projects can contribute annually about 15-17 bcm of gas to the pipeline by 2018, and this volume is barely enough to satisfy domestic consumption and feed two 5-million-tonnes-a-year trains at the future LNG plant in Vladivostok. Nothing will be left for China in the gas flow from Sakhalin unless the LNG project is scrapped.
New lines from Eastern Siberia? According to the most optimistic scenarios drafted by Gazprom planners, it will take the company at least six years to start delivering gas from the Chayanda project in Yakutia via the planned Power of Siberia pipeline (some 4-5 bcm a year), and annual supply of 29-30 bcm would become possible only ten years after that.
The impossible promises Gazprom makes to China may have a cynical rationale, apart from reporting a semblance of progress to the Russian government. The gas monopoly’s management can make any commitments being aware that the plans will never materialize because there is a mammoth stumbling block on the road to the final contract: the price of Russian gas.
A thousand cubic meters of natural gas delivered to Vladivostok via the pipeline from Sakhalin cost $643 in 2012, if financial reports of Gazprom and state budget figures are to be trusted. The federal government subsidizes local consumption paying about $300 million a year to Gazprom to cover the loss from these sales. Is Moscow prepared to expand the subsidies to Chinese consumers?
Mikhail Krutikhin
Published with the kind permission of RusEnergy. 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.