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On 4 February 2022, Gazprom and China National Petroleum
Corporation (CNPC) signed a new gas pipeline supply agreement for
10 Bcm/y when Russian President Putin visited Beijing to attend the
opening ceremony of the Winter Olympics. This is the second
pipeline import contract between Russia and China, with the first
one being the 38 Bcm/y supply contract through the Power of
Siberia-1 pipeline. This time, gas will be delivered via a new Far
Eastern route sourcing from Sakhalin. This means that the gas
source is physically separated from fields currently supplying
Europe, the still-under-discussion Power of Siberia-2 pipeline
project, and Power of Siberia 1. The deal will be settled in euros
in an effort for both sides to diversify away from payments in US
dollars. Other details, including the timing of first gas, ramp-up
period, specific gas source, pricing structure, pipeline route, and
entry point, have yet to be announced.
The Far Eastern route benefits from supply and pipeline
availability and a cost advantage. The most likely source of supply
is Gazprom's Sakhalin-3, particularly the offshore
Yuzhno-Kirinskoye field which alone can achieve 21 Bcm/y of
production capacity, and along with two other gas fields, can
support 25 Bcm/y production plateau. In terms of pipeline
requirements, the Sakhalin-Khabarovsk-Vladivostok pipeline can add
compressors to support the new contracted volumes to bring gas to
the entry point 100 km north of Vladivostok, but China will need to
add about 800 km of new pipelines. Alternatively, a 580 km new
connector pipeline between Khabarovsk and Blagoveshchensk can bring
Far Eastern gas to the same entry point as Power of Siberia-1, then
China only needs to add compressors to its existing pipelines
instead of building new ones. The estimated break-even cost of the
Far Eastern route at the Chinese border should be in the range of
$3.3-3.8/MMBtu, counting upstream and transportation costs
exclusive of export duty and $4.8-5.3/MMBtu inclusive of export
duty. This break-even cost should be low enough for the project to
be profitable if contracted pricing arrangements are similar to
those for Power of Siberia-1.
The new deal represents a significant gas supply increase for
China in general and CNPC in particular. Although recent Chinese
policies indicate that natural gas will play a supporting, not
main, role in achieving China's carbon emissions ambitions,
incremental gas demand in absolute terms will still be material to
displace coal use. In addition, following the recent spot LNG price
volatility, there has been a dash back to long-term contracts, LNG
import contracts in 2021 and a pipeline import contract now. The
Far Eastern gas supply is unlikely to create new Chinese gas
demand, because it will mostly target the same regional gas markets
based on urbanization, economic growth, and affordability. If the
new contract has a similar pricing structure and levels as the
Power of Siberia-1 contract, this new supply will be competitive on
a delivered basis against new LNG imports in China's northern and
most central coastal provinces, squeezing Chinese demand for LNG
imports. The magnitude of the impact will depend on the actual
ramp-up schedule. Given the development time requirement, including
the fact that the Yuzhno-Kirinskoye gas field is under US sanction,
first gas may arrive around 2025 and full contracted volumes could
be achieved within five years from the start of exports.
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May 18
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