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[Analytics] Russia gas exporters expand south, east and north

Pipeline-laying ships at work on Turk Stream in the Black Sea in June 2017. Photo: AFP/Turk Stream/Andalou Agency.

Pan Pacific Agency | COMMUICATION AGENCY FOR PACIFICA REGIONS

They are engineering marvels and potential cash cows for the Russian exchequer, but questions of both politics and economic viability hover over the giant natural gas pipeline networks Moscow has created to pump the natural riches of Siberia to energy-hungry economies across Eurasia. Giovanni Pigni specially for the Asia Times.

Power of Siberia, a pipeline project connecting Siberian gas fields with China’s northeast, was inaugurated last December by Russian gas giant Gazprom. TurkStream, a pipeline pumping gas to southern Europe was inaugurated this January. However, Gazprom’s Nord Stream 2 pipeline to northern Europe, which had been scheduled to begin operations before those two, languishes in stasis.

Even so, natural gas is a big earner for Moscow. Last year, the Russian Energy Ministry estimated Russian gas resources as being worth US$178.6 billion. Together with oil ($626.4 billion), coal ($31 billion) and other mineral resources ($26.8 billion), they made up roughly 60% of Russian GDP in 2017.

According to the Russian Central Bank, income from natural gas exports was $38.6 billion in 2016, $38.1 billion in 2017 and $49.1 billion in 2018.

Russian gas exports have surged since late 2019 – a year for which figures are not yet available – and are expected to increase further in coming decades. According to a joint analysis by the Institute for Energy Studies of the Russian Academy of Sciences and the Energy Center of the Moscow School of Management Skolkovo, export volumes are to increase by 20-43% in the next two decades – depending on pricing in global energy markets, which can fluctuate wildly.

But not all share a rosy outlook. Citing technological, economic and geopolitical issues, some critics question the commercial viability of these massive projects.

Nord Stream 2 stalled

Following Nord Stream 1, laid on the floor of the Baltic and inaugurated in 2011 to pump LNG to Germany and from there to Western Europe, Nord Stream 2 was expected to double capacity. It was scheduled to come online in late 2019, but completion is now in doubt. Swiss Allseas, Gazprom’s main contractor laying the pipelines, has suspended operations due to US sanctions.

Nord Stream 2 has sparked criticism in Brussels for circumventing traditional gas routes through Ukraine, potentially depriving that country, in confrontation with Russia since 2014, of transit revenues. It is also taking flak from Washington which has imposed sanctions on companies involved in the project, in retaliation for alleged Russian meddling in the 2016 presidential elections.

Outwardly, Gazprom is bullish. The firm’s deputy head Elena Burmistova said the project “is 94% finished and will be completed by the end of 2020 without foreign involvement.”

But one analyst says Gazprom lacks the assets to finish the job.

The only pipe-laying ship in Gazprom’s fleet up to the task is the Akademik Cherski. “The vessel is currently docked in Russian Far East and needs significant maintenance in order to become operational,” said Mikhail Krutikhin, a partner at independent, Moscow-based consulting firm RusEnergy.

Washington’s sanctions ended up favoring Ukraine, which on December 30, 2019, secured a new five-year contract with Gazprom. Under that contract, 65 billion cubic meters, or bcm, will be trans-shipped through Ukraine in 2020, and 40 bcm per year in the 2021-2025 period.

While these volumes fall below the 90 bcm pumped in 2019, they are well beyond the 10-15 bcm that Gazprom CEO Alexei Miller expected upon completion of Nord Stream 2.

So, for the near-term at least, Russia’s gas exports to Europe will rely heavily on the traditional Ukrainian route. But while Nord Stream 2 sits idle, Russia’s gas export diversification strategy is unfolding massively on other frontiers.

Looking south: TurkStream

Starting from this year, a significant amount of Gazprom gas will be rerouted from the Ukrainian network to TurkStream, a new pipeline connecting Russia with Turkey and southern Europe. Inaugurated in January, TurkStream will be pumping 31.5 bcm of gas every year in pipes running along the bottom of the Black Sea.

That will deprive Ukraine of about $450 million per year in terms of transit fees, according to estimates from Ukraine’s gas pipeline operator. Among the main beneficiaries is Bulgaria, which will save about $46.5 million per year in transit, according to Bulgarian gas company Bulgargaz.

Gazprom pivots East

Under most scenarios, European demand for natural gas will stagnate, mainly due to renewables. But at the far end of the Eurasian continent, the Asia-Pacific region, and China in particular, are expected to become leading growth vectors for Russian gas.

In December, Gazprom launched Power of Siberia, a more than 3,000km pipeline connecting gas fields in Eastern Siberia to China’s northeast border.

The whopping $400 billion, 30-year contract involving Gazprom and China National Petroleum Corporation (CNPC), was signed in 2014, when Russia’s relations with the West hit historic lows. The project symbolizes Moscow’s growing strategic partnership with Beijing.

According to the deal, up to 38 bcm will be delivered each year for three decades. The pipeline is expected to hit its maximum capacity, 38 bcm, in 2025.

Bringing Power of Siberia online was a “truly historical event,” said Russian President Vladimir Putin while inaugurating the pipeline via remote video with Chinese President Xi Jinping. The project, Putin said, will play a key role in raising Russia-China mutual trade turnover to $200 billion by 2024.

China’s growing demand is a consequence of dwindling domestic supplies combined with China’s increasing decarbonization. “Power of Siberia will bring Russian gas right where it is most needed, to the Chinese market, currently the fastest developing import gas market in the world,” pointed out Sergey Kapitonov, gas analyst at the Energy Center of the Moscow School of Management Skolkovo.

According to some estimates, China’s gas demand will increase from threefold to fivefold by 2035. Power of Siberia diversifies China’s imports, which already came from Turkmenistan via the Central Asia-China Gas Pipeline, and in the form of LNG shipped mainly from Australia, Qatar, Malaysia and Indonesia.

In China’s northeast, Russian gas is highly competitive given low transportation costs. However, the region won’t be able to absorb the contracted volumes in full – hence additional infrastructure will be built by China to carry the piped gas to China’s southern regions. There, it will face strong competition from LNG.

Is Power of Siberia profitable?

However compelling its scale, critics of Power of Siberia question its profitability, pointing at the enormous construction costs, estimated at $55 billion to $70 billion.

Krutikhin says forecasts that the pipeline will hit full capacity by 2025 are over-optimistic, given that one of the two gas fields still has to be connected to the bulk of the project.

“Operations connecting the Kovykta gas field with the pipeline haven’t started yet, which means it will take 10-12 years before the pipeline will work at full capacity,” Krutikhin told Asia Times. According to the expert, Gazprom’s investment in the project will never be recouped.

According to Dmitry Marinchenko, lead analyst for oil and gas at Fitch, the profitability of the project will largely depend on the price at which gas goes China – a dynamic subject to the whims of global energy markets.

“Considering that oil and gas prices will likely remain relatively low for the foreseeable future, there is a high chance the project won’t pay off,” Marinchenko said.

Many say that Gazprom’s projects rarely follow purely commercial logic. Rather, they promote the Kremlin’s geopolitical interests. “Strengthening relations with China and diversifying export routes are the main rationales behind Power of Siberia,” said Marinchenko.

But Kapitonov says the significance of Power of Siberia beyond profitability should not be underestimated: the project augers increased Sino-Russian energy cooperation.

Indeed, Gazprom has been in talks with China regarding two more pipeline projects. Power of Siberia 2 would connect gas fields in Western Siberia with China’s Xinjiang, and a Far Eastern pipeline would connect China with the gas fields on Russia’s gas-rich island of Sakhalin.

Looking north

Russia’s gas exports to China don’t rely solely on pipes. Melting ice in the Arctic is unlocking the Northern Sea Route, the maritime highway that runs along the northern rim of the Eurasian continent and Beijing shares Moscow’s strong interest in developing what the Chinese dub the “Arctic Silk Road.”

And climate change is unlocking not only economical routes for LNG cargoes, but it is also enabling LNG extraction.

Yamal LNG, a liquefied natural gas plant run by Russia’s privately owned firm Novatek in the remote Yamal Peninsula, was realized thanks to China’s National Petroleum Corporation and Silk Road Fund, which own a combined 29.9% of the project. Currently, Yamal LNG is already producing 16.5 million tonnes of liquefied gas per year.

Another Novatek plant, Arctic LNG-2 in the nearby Gydan Peninsula, is scheduled to go operational in 2022. The plants will produce 80 million tonnes of LNG over the next decade, 80-85% of which will flow to the Asia Pacific.

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