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Gazprom finds a new way to supply gas to China

August 27, 2015

Gazprom hasn’t been able to come to an agreement with China on gas supplies along the western route and on the eve of the Putin’s visit to China offers the Chinese a new way of the supply – through a gas pipeline from Sakhalin. Russia is extremely interested in such project, as the key for the region South Kirinskoye field suddenly came under US sanctions, which severely restricted the possibility of its development. But the question is whether Beijing is ready to seriously spoil relations with Washington for Moscow.

Yesterday, head of Gazprom Alexei Miller announced that the company could sign a memorandum with Chinese CNPC on pipeline gas deliveries from the Russian Far East ‘in the near future’. According to him, the companies ‘included the project in the draft program of joint actions of the strategic partnership’. Mr. Miller made a statement in Beijing by results of the regular talks with CNPC on gas supplies along the western route (via Altai, the project is now called Power of Siberia-2). The contract is very important for Gazprom, as it will allow the company to use the production capacities in Western Siberia, which are now partly idle. But in this regard the parties are unlikely to achieve considerable success – the press release of Gazprom says only that ‘the negotiations are on track’. According to the Kommersant’s interlocutors familiar with the situation, there are still fundamental differences at the price, volume and time of the deliveries.

The idea for the supply of pipeline gas to China from the Far East appeared not for the first time. Alexei Miller said this in October 2014, explained that the project could become a substitute for the construction of an LNG plant in Vladivostok. There are good prerequisites to implement the new supply route: proven reserves of gas on the Sakhalin shelf (within the Kirinskoye block of Sakhalin-3), as well as the already built gas pipeline of Sakhalin – Khabarovsk – Vladivostok (after Khabarovsk, it is almost along the border with China), the capacity of which can be increased by adding additional compressor stations. But until now it seemed that Gazprom chose a different path of the development of the Sakhalin’s assets: in June, the monopoly signed a memorandum with Shell that gas from the Sakhalin-3 project would be used to expand the capacity of the LNG plant that already operates on the island.

The situation changed after at the beginning of August the USA suddenly imposed the sanctions against the main deposit of Gazprom on the Sakhalin shelf – South-Kirinskoye one, without the gas of which none of new export projects can be realized in the foreseeable future.

The sanctions provide for the ban on the supply of equipment that puts an end to the current scheme of underwater development of the South Kirinskoye field, as technologies and equipment for subsea gas production are manufactured only by American and European companies. Accordingly, the cooperation with Shell on this project actually failed. Yesterday, the company didn’t comment on the prospects for the joint project with Gazprom in the light of the US sanctions or any new proposals of the monopoly to China.

As a result, now Gazprom again drastically changes the development strategy of the Sakhalin assets and proposes the Chinese side to discuss participation in the project, which is uniquely and directly under the US sanctions. Analysts’ opinions of how much such an option is acceptable for China todiverge. The Head of the Russian-Chinese Center of Trade and Economic Cooperation Sergei Sanakoyev thinks that China ‘won’t take into account the sanctions’. He stressed that a number of Chinese state-owned companies themselves were in the US sanctions list (in connection with the alleged transfer of the technology of ballistic missiles to Iran). However, head of the Asia program of the Moscow Carnegie Center Alexander Gabuev believes that the Chinese ‘may sign the memorandum, but will be very careful in the practical actions on the project’. He notes that the largest Chinese oil and gas companies such as CNPC, won’t take risks, and the emergence of another irritant in the relations with Washington is now unprofitable for Beijing. ‘The Chinese need gas not so much to spoil their relations with the United States,’ – Maria Belova of Vygon Consulting agrees. She cites the example of the same Iran, where Chinese companies actually froze activity after the introduction of the US and EU sanctions, although China officially didn’t join these sanctions. Maria Belova also indicates that China has no technologies for the subsea gas production.

According to the Kommersant’s interlocutors in the industry, the Mr. Miller’s statement may be a part of the information campaign prior to the visit of Vladimir Putin to China on September 2nd-3rd. ‘The main economic point of the negotiations was supposed to be the contract for the western route, but there is no agreement and it’s necessary to fill the visit with some content,’ – says one of the Kommersant’s interlocutors. According to the press release of Gazprom, yesterday Alexei Miller discussed with the head of CNPC Wang Yilin not only the western route, but also the cooperation in the underground gas storage, power generation, mechanical engineering for the oil and gas industry, as well as projects in third countries. Another source of the Kommersant notes that the words of Alexei Miller may be a signal to the US Government that the sanctions will only lead to the strengthening of the ties between Russia and China. But, he said, ‘the signal should be followed by some real action’.

Source: Oil Voice

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