A Blue Dream: will China be able to save Russian gas exports

Alexey Belogoryev, Research and Development Director at the Institute for Energy and Finance, commented to Forbes on the prospects of Russian pipeline gas supplies to China.

Deputy Prime Minister Alexander Novak, in a recent article in the Energy Policy magazine, announced ambitious plans to increase Russian gas exports to the East to 170 billion cubic meters in seven years. This is expected to be achieved through the implementation of major infrastructure projects - Power of Siberia 2 and the so-called Far Eastern Route, which should be launched in addition to the already operating pipeline Power of Siberia 1.

According to the initial plan, the Far Eastern Route is planned to be launched by 2025. But Alexey Belogoryev doubts that this is feasible. 

"The reason is simple — the problem with the resource base on Sakhalin itself," the Forbes interlocutor says. — Today there are many people who want to distribute Sakhalin reserves in various ways — this is the gasification of the Khabarovsk Territory and Primorye, LNG production and, in fact, pipeline gas supplies to China. I assume that deliveries along this route can most likely begin between 2026 and 2028. Although an acceleration is possible."

Alexey Belogoryev believes that Power of Siberia 2 can be put into operation at best by 2030, and will reach its design capacity closer to 2035:

"The deadlines may move, but the project is very capital—intensive, and according to the experience of the implementation of Power of Siberia 1, which was planned for a long time and built for five years, this is the exactly picture."

As one of the problems of Power of Siberia 2, the expert calls the low profitability of the project:

"Investments in it are recouped in the long term, but there is no comparison with exports to Europe here. And the main problem of our entire turn to the East is connected precisely with the fact that we can replace supplies to Europe in physical volume, but we are not able, at least in the foreseeable future, to provide comparable supplies in value terms due to the unwillingness of most Asian consumers, including China, to pay so much for gas, how rich European countries allowed themselves to pay in some periods."

"An alternative [to the construction of the Power of Siberia —2] may be the active development of LNG production as a more flexible commodity that has no problems with monopsony (the situation in the market when the monopoly position of the buyer allows him to dictate terms to a multitude of sellers, — Forbes)," Belogoryev believes. With all the disadvantages of LNG projects associated with high capital costs and transportation costs, the long-term return on LNG exports in terms of average gas sales prices is likely to be higher than from all pipeline supplies to China.

Today, China, according to the analyst, is not particularly interested in accelerating the implementation of joint gas projects, especially Power of Siberia 2.

"The Chinese leadership does not fully understand what the demand for gas in the country will be in the 2030s or even in the second half of the 2020s," the expert says. "This is due, on the one hand, to the decarbonization policy, and on the other hand, to the rather strong reversal taking place in the last two years towards coal consumption, especially in electricity generation, and the acceleration of the development of renewable energy to the detriment of gas."

According to Belogoryev, Russia can compensate for the losses of pipeline exports to Europe by increasing LNG exports and pipeline supplies to China only in the future for about 10 years, that is, in the early 2030s.

But this does not solve the current problems associated with the formation of a huge excess of production and transport capacity in the zone of the Unified Gas Supply System of Russia — a technological complex that includes facilities for the production, processing, transportation, storage and distribution of gas in the European part of Russia and Western Siberia, Belogoryev notes.