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Lower Energy Prices Causing China-Russia Project Hiccups – Analysis


By Michael Lelyveld

Russia’s biggest energy deal with China faces delays as economic pressures mount in both countries, raising risks for the plan to link Siberian gas fields with China’s industrial northeast.

On Dec. 29, Russia’s monopoly Gazprom said it had cancelled a tender for a major portion of its mammoth Power of Siberia pipeline project after regulators objected to anti-competitive terms.

Gazprom’s record tender for an 822-kilometer (510-mile) section of the pipeline was set to award 156 billion rubles (12.8 billion yuan) to “a single contractor for the entire set of works required for gas transportation” in order to “optimize costs,” Interfax reported.

But on Dec. 7, Russia’s Federal Antimonopoly Service (FAS) cited faulty documentation and “bidding criteria that were not measurable,” the news agency said.

The regulatory roadblock came one week after Gazprom awarded 197.7 billion rubles (16.3 billion yuan) in pipeline contracts without competition to a construction firm owned by Arkady Rotenberg, a friend of President Vladimir Putin and a target of Western sanctions over Russia’s conflict with Ukraine.

It was unclear whether the FAS action was meant solely to head off higher costs from limited competitive bidding. But cost is one of several problems for the gas deal that was valued at U.S. $400 billion (2.6 trillion yuan) when it was signed with China National Petroleum Corp. (CNPC) in 2014 after a decade of talks.

Technical challenges

Murky contracting, bureaucracy and technical challenges have all hindered progress on the plan to meet China’s demand for cleaner-burning fuel, according to a year-end Interfax report.

“‘The project is on schedule,’ Gazprom officials intone.

Meanwhile, the available information suggests that although Power of Siberia may be a future hero, it is currently facing a struggle just to stand up,” Interfax said.

The entire project stretches 3,968 kilometers (2,465 miles) to the Chinese border at an estimated cost of U.S. $21.3 billion (140.1 billion yuan), according to the TASS news agency. So far, 80 kilometers (50 miles) of pipeline have been completed, Interfax said.

The normally well-connected news agency voiced frustration with Gazprom over unanswered questions about the project. The company has been reorganized into numbered departments without clear responsibilities, it said.

“Thus, Power of Siberia’s image is being shaped by tender flip-flops, postponements, cancelled purchases, new purchases and single-tender purchases,” said the report.

Delays have caused contractors to miss much of the winter construction season in the Siberian wilderness, when the terrain is frozen and more stable. Construction costs per kilometer are several times higher than in western Russia, it said.

But external conditions facing the project may be even more challenging.

Export gas prices have plunged nearly 50 percent since the 30-year export deal was signed, making it unlikely to still be worth U.S. $400 billion. Peak volumes under the contract would reach 38 billion cubic meters (1.3 trillion cubic feet) a year.

Reports of the start-up date for deliveries have gradually slipped from 2018 to 2019 to 2021 and beyond.

Anticipated profits shrinking

While the anticipated profits for Russia are shrinking, an expected prepayment from China of U.S. $25 billion (164.5 billion yuan) never materialized. Reports suggest that Chinese banks have been wary about lending to Russia, which is bearing dual-burdens of sanctions and recession.

Russia’s gross domestic product (GDP) fell 3.7 percent last year, Economic Development Minister Alexei Ulyukayev said Monday.

China’s reluctance to finance the pipeline has hindered Gazprom’s strategic shift to focus on Asia, which was meant to send a message to Western critics and spur competition for Russia’s resources.

In early December, Interfax said Gazprom would return to its previous practice of holding its annual investment meetings in New York and London after moving them to Hong Kong and Singapore last year.

The report cited “the indecisiveness and conservativeness of Asian investors, and also the limited size of the Asian financial market.”

Russia-China trade fell nearly 28 percent last year due in part to the oil slump, China’s General Administration of Customs (GAC) reported. Russian exports to China were down 19 percent to U.S. $31.4 billion (206.5 billion yuan).

While conditions in Russia threaten delays, weakening economic growth in China has created little pressure for speed, despite the push to replace more high-polluting coal with cleaner gas.

The growth of China’s gas consumption dropped from 17.4 percent in 2013 to 8.9 percent in 2014, according to CNPC.

Last year, the growth rate over 11 months dipped to 3.7 percent, the National Development and Reform Commission (NDRC) said.

The major market for Power of Siberia gas in China’s industrial northeast has been struggling with the slowest GDP growth rates in the country and extreme production overcapacity.

Some plants that once may have been counted as potential gas consumers are now more likely to be shut down.

The combination of factors appears to be working against the gas deal on both sides.

On Jan. 16, Ulyukayev denied that terms of the deal would change due to weaker Chinese demand after Reuters quoted a Gazprom source as saying that volumes could be cut back.

Too important to abandon

Over the past year, Russian officials have periodically pushed for additional pipelines to China, including a western route through Xinjiang, but reports of progress have been few and far between.

In November, an intergovernmental commission concluded that a “new model of cooperation” would be needed to pursue the western route in light of lower energy prices, Interfax reported at the time.

In December, Gazprom and CNPC signed an agreement on design and construction of the Amur River border crossing for the Power of Siberia project, but that work could be years away.

Despite rising problems, Moscow remains committed to the costly project, which has been seen as a key to unlocking the resource wealth of Eastern Siberia and the Russian Far East, said Edward Chow, senior fellow for energy and national security at the Center for Strategic and International Studies in Washington.

“Since the agreement was signed, oil and gas prices have collapsed, projected Chinese energy demand is softer than expected, Russian country risks have gone up and its ability to finance expensive projects has deteriorated,” said Chow.

“So, delay is to be expected. The question is for how long. It would not surprise me if the project does not flow significant gas volumes until 2025 or beyond,” he said.

Chow sees the expected prepayment from China as an indicator of progress, and this has been missing. But the stakes may be too high to give up on the project.

“Since this is a strategically and politically important project for both Russia and China, it will not be abandoned.

There are always things that state-controlled companies can do to appear to make progress,” he said.

But Russia may face even tougher challenges in developing Siberia’s giant Kovykta and Chayanda gas fields that are planned to supply the pipeline.

“The pipeline itself should be the simplest part of the project,” Chow said.

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One thought on “Lower Energy Prices Causing China-Russia Project Hiccups – Analysis

  • January 27, 2016 at 6:58 am

    Beneath every political conflict in the world today lies what looks to me like the very high stakes effort the US has been making for some time to control the world’s energy markets and the locations for building the necessary pipelines to take the oil and nat. gas to markets. The deliberate OPEC/US drive-down of oil prices below the cost of production has, I believe, been engineered deliberately in order to drive out of business those economies highly dependent upon oil/nat.gas sales (Russia, Ukraine, Iraq, Syria, Venezuela, Mexico, are some). The major oil fields in Africa will, pretty soon, appear on our radar screens as fields the US just has to control (for one reason or another; terrorism will be put forward as the main reason.) The entire project is insane (it includes the very unwise fracking going on across the US, which is contaminating unknown numbers of fresh water aquifers that will soon be desperately needed for drinking and for agriculture).
    There are many examples: I will give one. A fairly unknown major oil strike is the one in the Golan Heights, now being exploited by a US oil company, Genie, with a number of prominent neo-Cons on its board, and, in my view a reason for the supremely irrational US position of “Assad must go.” As of this moment, the oil in the Golan belongs (by int. law) to Syria. But if Syria is demolished and broken up, there’s no doubt in my mind that the huge pool of oil in the Golan will then be taken over by the Greater Israel (Zionist) project.
    So, the real question is how long can the US and OPEC afford these disastrously low prices per barrel as they attempt to destroy their vulnerable competitors?
    For years, the US had a policy that no pipeline could be built that would serve Russian or Iranian interests. But now the US has quite arbitrarily decided that Iran is not a nuclear threat (it never was, really), and is ready to let it back into the community of nations. What’s the only possible reason for this policy change? Oil. When Iran’s production adds to the already tremendous glut of oil, will it not drive the price per barrel even lower? Of course it will. What’s the game plan here?
    And when the people of Syria, Venezuela, Iraq, Mexico, Nigeria, and all the other entities that sell oil have been made into desperate refugees, what then? World agriculture is now almost entirely based on petroleum-based fertilizers, pesticides, etc.
    (i.e. without oil, very little food can be produced). What then? Climate warming is obviously going to have a major impact on the planet’s ability to produce food.We are now using up our oil at prodigious rates by selling it so cheaply that it is hardly worth it to use it wisely. Only Russia is working hard on growing organic, non-g.m. foods. I do not know the answers to the questions I am raising, but as Shakespeare once wrote in a play of his “Something is rotten in the state of Denmark.”
    Bottom line, the West is extremely anxious that Russia’s attempt to escape from the Western noose of sanctions, depression, and devaluation of the rouble by making deals with China, should fail. Yes, China needs the energy, but China is also on the US hit list as the US, the world’s largest and most aggressive mil/ind. complex, struggles to remain global hegemon, in the face of competition from the same two power-centers that the US feared would cooperate with each other during the Cold War–the USSR and the PRC. Does history repeat itself? Not precisely, perhaps, but the same structures are still in place.
    What was the Wolfowitz Doctrine by which we destroyed Iraq? the W. Doctrine said now (while Russia is still weak) will be a great time to get Russia out of the Middle East–where it has the same two clients it had during the Cold War: Syria and Iran. Is that why the US and its Sunni flunkeys in the Gulf have hired, armed, and funded all these jihadi fighters, mostly Wahhabis, to go into the territory we want broken up and create that most terrifying of new enemies–a Caliphate living by sharia law!!! Surely nothing more dreadful has been invented since Muhammed produced the Quran. I myself think it is much more likely that we will be destroyed by our own nuclear weapons than by a gang of crazies in suicide vests. Or perhaps we’ll be destroyed by an economic system, capitalism, that is perfectly willing to lay waste the planet for the sake of making a profit by controlling the energy sources and the pipelines.


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