BY OLESYA ASTAKHOVA AND CHEN
AIZHU
Russia is likely to scale back volumes of gas it
plans to ship to China later this decade, sources close to energy giant Gazprom
say, due to the dive in global energy prices and uncertainty hanging over the
Chinese economy.
The sources insist the hugely expensive pipeline
project - part of President Vladimir Putin's strategic shift eastwards - will
go ahead on time. However, they acknowledge sales to China will initially be lower
than envisaged when Moscow reached the $400 billion deal with Beijing in May
2014.
"We will start fulfilling the deal in 2019,
but the volumes could be less that initially expected," a source at
Gazprom told Reuters.
At the time of the deal, crude oil was trading
above $100 a barrel but has since plunged to $30. In this period growth in the
Chinese economy has also slowed sharply, with its currency falling and its
stock market now in turmoil.
Moscow is keen to "pivot to the East"
to reduce its reliance on exporting energy to the West due to a series of rows,
notably over Russia's annexation of Crimea and support for separatists in
eastern Ukraine.
China is in a buyer's market. Abundant energy
supplies are now available from other sources, such as liquefied natural gas
(LNG) from Qatar and Australia and pipeline gas from Central Asia, and this is
undermining the Kremlin's plans.
Gazprom's media relations team did not comment
on emailed questions from Reuters although the state-controlled company, which
has a monopoly on Russian pipeline gas exports, has said the project to ship
gas from eastern Siberia to China is on track.
Flows through the Power of Siberia pipeline,
which starts in East Siberia, are due to start at 5 billion cubic meters (bcm)
of gas, rising to 38 bcm annually under the 30-year deal - just below what
Gazprom's top gas buyer, Germany, now gets.
The pricing mechanism for what China will pay
has not been revealed. Sources and analysts say the oil breakeven price for the
Russian gas exports to China is around $80 per barrel, a level that is unlikely
to be reached in the foreseeable future.
"In any case, the volumes will be lower
(than announced)," said another source, who is close to Gazprom and
familiar with the talks with China. "Gazprom has taken on an uphill task
and failed."
TURKMENISTAN BEATS RUSSIA TO MARKET
Several industry sources have said Gazprom was
hoping to sell gas to China for $10-$11 per mmBtu - an energy measure. By
contrast, China is understood by analysts to be paying $9 per mmBtu to
Turkmenistan, the former Soviet republic in Central Asia that beat Gazprom to
the Chinese market.
No one knows where energy prices will be at the
end of this decade or what state the Chinese economy will be in. But all bets
seem to be off for now after oil's 70 percent plunge in the past 18 months.
Benchmark Asian spot LNG is trading at $6.50, down from over $13 in May 2014.
Analysts see a delay as the likely outcome.
"The parties are likely to postpone the project commissioning into the
late 2020s," Mikhail Korchemkin, a director of U.S.-based consultancy
East European Gas Analysis.
He sees the breakeven price for Russian gas
exports to China, as measured by the benchmark Brent crude price, at $75-$85
per barrel - but only if the pipeline construction is done by Chinese
contractors, whose involvement promises to cut costs.
It is not clear whether Moscow will accept
foreign contractors or will insist on Russian firms doing the work on its
territory.
Gazprom had initially planned to invest $55
billion in exploration and pipeline construction to China's border. The costs
may have since been cut due to a slide in the ruble's value which has pushed up
the cost of imported equipment.
The project includes building a huge gas
processing plant needed to provide methane of the required quality and clear it
of helium, which is abundant in the east Siberian gas fields.
In a sign of increasing difficulties for the
Kremlin's energy champion, sources have said Gazprom has asked other Russian
gas producers to help it out to honor the deal.
CHINESE TURMOIL
Chen Zhu, Beijing-based managing director of
consultancy SIA Energy, said the economic turmoil in China makes the project
less attractive. "There is no doubt the project is strategic but on the
China side, the demand outlook is not that rosy as the economy is
slowing," she said.
Chen said 2020 is a more realistic date for gas
to start flowing. "Due to very high costs required to develop the large
gas fields in Russia, China and Russia share the understanding
that neither side is in urgent need," she said.
The Oxford Institute for Energy Studies also
said in research published in September that Beijing was in no rush to allow
Russian gas into its market.
"It would increasingly appear that Gazprom
is at the mercy of its Chinese counterparts, who are operating in a buyers'
market, have the lure of financing to offer, and have every incentive to adopt
a wait and see policy in gas import negotiations," it said.
($1 = 76.4700 rubles)
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