Upstream gaps remain in massive China-Russia gas deal

Lucrative upstream projects, such as the joint development of gas fields, are missing from the details as well as payment terms, Barclays says

PUBLISHED : Tuesday, 27 May, 2014, 9:24am
UPDATED : Wednesday, 28 May, 2014, 12:14am


The US$400 billion 30-year Sino-Russian gas agreement signed last week by the two nations' state-backed energy giants was hailed by analysts as a win-win deal, but some unknowns could affect the sharing of benefits and risks.

Absent from the announcement on May 21 was any reference to the possibility of joint development of the fields that would supply gas to northeast China. Upstream gas production is typically the most lucrative part of the energy supply chain.

Also left up in the air are details about payment terms.

The releases are silent on other deal covenants ... which may yet emerge over time

"The [press] releases are silent on other deal covenants ... which may yet emerge over time," said Barclays in a research report. "China had been keen on upstream exploration and production in Russia ... while Gazprom may be keen on pre-payment or credit, given generally elevated risk to its access to global credit markets posed by the Ukrainian crisis, and also to partly fund the US$55 billion that Gazprom expects to spend on projects to feed this contract," Barclays said.

These cover gas field development costs, construction costs of the proposed pipeline from the field to the Sino-Russian border and gas processing facilities.

President Vladimir Putin last week said Russia would invest US$55 billion and China roughly US$20 billion in order to realise the contract. It is not known whether the US$20 billion to be spent by the Chinese side includes any upstream field development spending in addition to expenditure for building the Chinese side of the pipeline.

According to Gavin Thompson, the head of Asia gas research at London-based consultancy Wood Mackenzie, development of one of the fields that would supply gas to northeast China called Chayandinskoye will be "difficult with complex geology relative to west Siberia [that supplies Europe]".

Alexander Medvedev, the chief executive of Gazprom's export unit Gazprom Export, was quoted by Reuters on Friday saying that China National Petroleum Corp - the parent of listed PetroChina - had agreed to pre-pay US$25 billion for the gas, but added that details were under discussion.

The gas deal, sealed after more than 15 years of negotiations - mostly over price haggling - would diversify Russia's gas markets and reduce its reliance on Europe, which buys the vast majority of its gas exports.

It would also cut the mainland's reliance on expensive imported liquefied natural gas and give it a stronger bargaining position against LNG suppliers in the United States, Canada, Australia, Middle East and Asia, said Nomura head of regional energy research Gordon Kwan.

The mainland's gas demand is projected by state economic planning agency, the National Development and Reform Commission, to rise to 400 billion cubic metres by 2020 from 168 bcm last year.

The Sino-Russian gas pipeline would have an annual capacity to send 38 bcm of gas to northern China from as early as 2018, although analysts said there was risk of a delay in delivery given the scope of the gas fields' development and infrastructure that needed to be built.

Russia's gas exports to Europe first reached 38 bcm over three decades ago, primarily to western Europe. This has since surged to more than 150 bcm, serving western and eastern Europe, according to Thompson.

"We anticipate overall [Russian] gas demand from China over the next two decades will grow more rapidly than that witnessed in Europe from the mid-1980s," he said.

Thompson projected that eight northern and northeast China provinces would be the main consumers of the gas to be imported from Russia.

With a population of 360 million - similar to that of Europe - the eight provinces' combined gas demand would reach 125 bcm by 2025, more than three times the initial supply volume from Russia, he said.