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China is a significantly less profitable market than Europe from the point of view of the gas industry economy

16 September 2022

Belogoryev Alexey M. Research and Development Director, Director of the Center for Energy strategic analysis and forecasting

Alexey Belogoryev, Deputy Principal Director on Energy Studies of the Institute for Energy and Finance, commented to Davydov.Index on whether the Power of Siberia 2 project can be considered as a replacement for the reduction in Russian gas supplies to Europe:

“The most obvious difference between these pipelines is that Nord Stream 2 has already been built and can be launched even tomorrow if there is certification. And the Power of Siberia-2, at best, can be launched in 2029-2030, that is, this is definitely not a way to solve the current problems of the gas industry. In addition, significant investments are needed here.

Although it must be admitted that a sharp drop in supplies to Europe from the Yamalo-Nenets District provides a resource base in terms of gas production. If not for this, it would also have to invest in it. When the Power of Siberia-2 project was initially developed, there were no 50 billion cubic meters of gas in the area where they planned to take gas from - it was necessary to conduct exploration, develop deposits, and so on. All this is quite expensive. And due to the drop in supplies to Europe, free capacities have arisen, and this means that investments in exploration and production will not be so large.

But in any case, this is a lot of money, because you need to build infrastructure. There are separate areas that can be used, but they need to be greatly expanded. And this is a huge distance - after all, it is necessary to stretch a gas pipeline from the north-west of Siberia to Mongolia. I do not think that the assessments that Gazprom made there in previous years in terms of investments are quite realistic. Most likely, the costs will be higher, and this should be borne in mind. In addition, within the framework of this project, there are a number of long-known problems.

The first of these is monopsony, that is, dependence on one buyer. There were many buyers in Europe - only now the European Commission is trying to promote the idea of ​​a single procurement platform for all countries there, and so far Gazprom has had more than 20 large clients there. And the company negotiated with them separately. And in the case of Power of Siberia-2, we only have China among our buyers. Well, and a very small market in Mongolia, which literally can only be born. Moreover, it will not exceed 4-5 billion cubic meters in terms of capacity in the long term.

And China, as you know, is a very difficult negotiator who is quite skillful in achieving minimum prices. So we get the need for large-scale investments from Gazprom for the construction of a gas pipeline across half of Eurasia through the territory of Russia - with a very low profitability of supplies. The price of gas supplies may even be several times lower than current supplies to the EU countries under long-term contracts - somewhere at the level of $200-250 instead of $600. And transportation costs will be higher. Yes, it is possible that there will be more efficient compressor stations, but in the best case, the costs will be comparable to the costs that we currently have when transporting to Germany.

Therefore, from the point of view of the economy of the gas industry and Russia as a whole, China is a significantly less profitable market than Europe. But, in fact, we do not have much choice here. An alternative to gas supplies to China can only be the construction of large LNG plants that will take gas from a single gas supply system. Actually, in September, Gazprom is already launching an LNG plant near the Portovaya compressor station, but this is a small project. And you need to build large factories, and not just one. Only then “Power of Siberia-2” may not be required.”


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