China Pays High Price for Russian Gas
An analysis by Michael Lelyveld 2020-05-01 -- China is paying a high price for natural gas from Russia's newly-opened Power of Siberia pipeline at a time when the COVID-19 pandemic has driven many energy costs down to historic lows.
On April 13, the Interfax news agency reported that the average price for gas from the 3,000-kilometer (1,864-mile) pipeline reached U.S. $203 (1,437 yuan) per thousand cubic meters in January and February, based on calculations from Russian and Chinese customs data.
At that level, Russia's gas monopoly Gazprom has been charging China more than twice as much as its reported prices for European customers, according to comments by Belarus President Alexander Lukashenko, who has been engaged in a long-running feud with Moscow over costs for his country.
"Today in Europe, Russia sells natural gas for (U.S.) $80, no more than $90 per thousand cubic meters, and we pay $127. Where is such a price today?" Lukashenko said in a separate Interfax report quoting the state news agency BelTA on the same day.
"Why fleece us?" Lukashenko said.
The tiff over prices provides a rare glimpse of Gazprom pricing practices and the comparative costs that state-owned China National Petroleum Corp. (CNPC) has been paying for gas from Russia's most expensive pipeline project at a time of stress in global markets as a result of the pandemic and a damaging oil price war with Saudi Arabia.
At a presentation to investors In February, Gazprom Export CEO Elena Burmistrova declined to confirm the premium price for China.
"We are often asked about the price of gas that is written in the contract between Gazprom and (CNPC). Unfortunately, however, we have not disclosed the price parameters, as the terms of the contract stipulate that this is a commercial secret," Burmistrova said.
The average price for China in the first two months of the year is only a snapshot of the costs that it is paying, but prices for Europe cited by Interfax for the same period suggest that charges for CNPC are about 30 percent higher.
Gazprom exports to the west, excluding Belarus, were priced at $168 in January and $145 per thousand cubic meters in February, the news agency said, citing data from Russia's Federal Customs Service.
Plunging spot market prices
This month, spot market prices for gas in Europe have plunged even further.
On April 22, British spot prices fell to $45.65 per thousand cubic meters, nearly 30 percent cheaper than rates in the domestic western regions of Russia, Azerbaijan's Turan Information Agency said.
As recently as February, Gazprom projected that it would be selling gas in Europe for $175-185 per thousand cubic meters, Newsbase Daily News reported this week.
Gazprom's prices for both Europe and China have been falling because both are linked to prices for oil products with a lag time for adjustments, which in China's case is said to be nine months.
While the contract terms are thought to be comparable, China's starting price before adjustments is said to be substantially higher.
The starting price for China was the final sticking point in the marathon negotiations on building the $55-billion Power of Siberia project, which began supplies in December.
The bargaining over the starting price lasted for at least three years.
The opening of the pipeline has been marked by turmoil, mostly as a result of the COVID-19 crisis.
Gazprom's startup of deliveries on Dec. 2 was quickly followed by reports that CNPC's PetroChina subsidiary had sent force majeure notifications to gas suppliers, calling for suspension of imports due to circumstances beyond China's control due to plummeting demand.
In early March, Gazprom denied receiving a notification, but five days later, the company said it would shut the line down for "routine maintenance" for the rest of the month.
On April 17, a further complication emerged with the announcement of a quarantine at the Chayanda oil and gas condensate field, the main resource for the Power of Siberia pipeline, due to a COVID-19 outbreak.
The Power of Siberia plan to ramp up exports from 5 billion cubic meters (bcm) this year to the peak annual capacity of 38 bcm in 2024 already faced concerns after China slowed the rate of coal-to-gas conversions under economic pressure last year.
But while international oil companies are slashing investments and putting projects on hold around the world, Gazprom appears bent on increasing its commitment to China.
In recent days, Gazprom officials have considered raising the production plateau of Siberia's Kovykta oil and gas field, the second resource for the pipeline, amid discussions about boosting exports to China by 5-10 bcm per year, Interfax reported separately last week.
In March, Russian President Vladimir Putin also approved the advancement of planning for a "Power of Siberia 2" pipeline project through Mongolia to the "pre-investment" stage with a feasibility study. The proposed line would have a capacity of up to 50 bcm per year.
Reliance on Chinese market
Gazprom's continued reliance on the Chinese market is remarkable, given the current series of setbacks and its failure to secure Chinese financing for Power of Siberia construction and development costs.
But conditions in Europe can be seen as justifying Gazprom's investment in China despite the drawbacks, said Edward Chow, senior associate for energy and national security at the Center for Strategic and International Studies in Washington.
Two relatively mild winters have combined with the pandemic and high storage levels in anticipation of a Russian gas conflict with Ukraine to collapse gas demand in Europe, Gazprom's primary export market, said Chow.
"For the time being, Russia's decision in 2014 to diversify its gas export market to China appears to be vindicated," he said. "Given that the initial large investment in Power of Siberia is now sunk, whether it achieved the desired rate of return or not, expanding the system is now a matter of incremental economics."
Despite the high costs and prices of gas development in East Siberia, Russia's monopolistic system remains geared to megaprojects and has little choice but to move ahead.
"Megaprojects take a long time to do. Whether they are completed at a propitious time is a matter of luck," Chow said. "The hope is that, over the 30-40 year life of the project, a reasonable return in achieved."
In defense of its high prices for China in a slumping market, Gazprom has resorted to some highly-qualified arguments regarding competition with pipeline gas from Central Asia and low-cost liquefied natural gas (LNG).
"Power of Siberia will compete with Central Asian gas supplies only in the north and east of China. Central Asian gas is not supplied to the northeast," Burmistrova said.
As for LNG, Burmistrova argued that lower-priced supplies would only be available to China under new contracts in eastern areas around Shanghai.
Much of China's LNG is imported under long-term contracts that were signed when prices were high.
"This means that gas from Russia will be among the most popular sources of imports in the targeted regions of the country," Burmistrova said.
Whether or not such arguments for higher-priced Russian gas prevail in China's gradually recovering economy remains to be seen, but at least Gazprom has made its case for the huge investment in the Power of Siberia project that has already taken place.
Edward Chow said that Russia also has no alternative to China for the development of resources in the region.
"What Gazprom does know is, if the giant gas fields in East Siberia are to be developed, the market for that gas has to be China, where gas import requirements will grow even if demand is temporarily weak," he said.
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