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In September 2019, Russian President Vladimir Putin proposed an
alternative route for Russian piped gas to reach China, across
Mongolia; this was aimed at breaking the current impasse between
the two sides over the long-proposed Power of Siberia-2 pipeline.
Previously, the pipeline was proposed for the so-called Altay
route, from West Siberia to western China, entering at Xinjiang.
The new Power of Siberia-2 pipeline, with 50 Bcm/y capacity, would
deliver Russian gas to China at a completely different location,
much closer to gas-consuming regions in eastern China, while at the
same time still utilizing gas resources from the prolific West
Siberian Basin. Total distance in Russia and Mongolia are estimated
at 2,600 km and 980 km, respectively. The pipeline distance within
China is estimated at only 560 km to the Beijing-Tianjin-Hebei
(Jing-Jin-Ji) demand center.
Figure 1: Russian gas pipeline system and key gas pipeline
projects
The new route is favorable for Gazprom. Besides the opportunity
to export additional Russian gas to China, a direct pipeline
connection between West Siberia and the Chinese market provides an
important diversification of supply options for Gazprom. The
immense gas resources of West Siberia are already known,
discovered, or even developed. Currently, this gas flows westward
into either the domestic market or is exported to European or
neighboring Commonwealth of Independent States markets. Consumption
in these markets longer term is expected to remain stagnant or grow
very little. In contrast, Chinese consumption is expected to be the
major growth engine for global gas demand. The new route also
provides an opportunity to monetize some additional gas from fields
along the route, mainly in Krasnoyarsk Kray, that would otherwise
likely have remained stranded.
We estimate that the current range of a potentially acceptable
border price for Gazprom is between $2.7/MMBtu and $4.7/MMBtu
excluding export duty. The low end of the range reflects just the
cost of gas production in West Siberia and cash opex to operate the
export pipeline, while the higher range reflects the export netback
from the European market in West Siberia and the required
investment tariff to cover the costs of construction for the Power
of Siberia-2 pipeline.
On the Chinese side, Power of Siberia 2 would require only a
relatively short transmission distance within Chinese territory to
bring gas to key demand centers. This clearly threatens other
sources of Chinese imports, especially Turkmen gas, as it is among
the highest delivered cost, largely owing to high landed price and
significant transportation tariff within China. Given our demand
growth expectations, Power of Siberia-2 may displace some domestic
production and LNG imports and/or create some additional demand
depending on its landed costs. Still, China is unlikely to need
both Power of Siberia-2 and Central Asia Gas Pipeline Line D for
additional Turkmen gas.
A concern for China on the new Power of Siberia-2 route is the
approximately 980 km of transit within Mongolia. China's Central
Asian gas imports involve external transit, but not via a
third-party country that is not also a supplier. Mongolia
undoubtedly would be interested in receiving additional revenues
from transit and an opportunity to gasify its capital, Ulaanbaatar;
Gazprom has worked with many transit situations before, so this is
not an insurmountable obstacle. However, third-party international
transit naturally increases the risks for project implementation
and future operation.
The new pipeline project is still far from reaching a final
investment decision (FID). Gazprom launched front-end engineering
and design (FEED) work in March 2020, but there are still many more
steps that need to be taken to move this project forward.
Importantly, we now believe that the project looks sufficiently
attractive to all the key participants for it to be included in our
base case outlook with first gas arriving in 2031.
Anna Galtsova is a director of the Russia and Caspian
Energy service at IHS Markit. Tianshi Huang is senior research analyst of the Greater
China Gas, Power, and Energy Futures service at IHS
Markit.
