Power of Siberia commissioning – a landmark for both Russia and China
On 2 December, the Power of Siberia (PoS) pipeline was successfully launched. The project is a milestone in the China-Russia energy relationship. The 30-year contract will ultimately stimulate US$37 billion of upstream investment in Russia and link East Siberia with the world’s fastest-growing gas market. It will diversify Russia’s gas sales destinations and help China achieve a cleaner energy mix.
Power of Siberia is unlikely to achieve its initial ramp-up target
Attention now shifts to the pace of the PoS ramp-up. Gazprom anticipates a five-year build-up to the contracted 38 bcm a year level. We expect the reality to be more gradual because of the cost competitiveness of Russian gas and China’s provincial demand growth. In our base case, PoS will take 7-9 years to reach full capacity, meeting 8% of China’s total demand in 2028.
Russian gas will be most competitive in northeast China, which can absorb up to 15 bcm a year of its supply. Moving south, transportation costs increase and competition with LNG imports will intensify. We expect that upon full ramp-up, Russian gas will be able to secure 13-15 bcm a year market share in the Beijing-Tianjin-Hebei and Shandong region, but less than 10 bcm a year in the Yangtze River Delta.
China’s market reform could reshape the state of play
China’s proposed market reform aims to improve third-party access to infrastructure – pipelines, LNG terminals and gas storage facilities. This may intensify the competition between LNG and Russian gas. Currently, few companies can benefit from low spot LNG prices as third-party access is immature. We expect Asian spot LNG prices to remain soft in the next two years on the back of robust supply growth. If third-party access is greatly improved by the early 2020s, this will impose further risks on the initial PoS ramp-up.
Yangtze River Delta – a battlefield of various supply options and a potential gas hub
New infrastructure (known as the ‘Russia-China East’ pipeline) is being built to deliver Russian gas to the demand centres. The pipeline ends in the Yangtze River Delta.
The Yangtze River Delta consists of Shanghai municipality, Jiangsu and Zhejiang provinces. This is the beating heart of China’s economic growth, and the pioneer in energy mix diversification. We expect the region’s gas demand will grow steadily by 6% year-on-year on average to reach 70 bcm in 2025.
With barely any local gas resources, the region relies heavily on deliveries via the West-East pipelines, Sichuan-East pipeline and six LNG terminals along the coastline. More regas projects are under way or planned, targeting the region’s incremental gas requirements.
Multiple established and new gas sources can supply at competitive prices. Penetrating the Yangtze River Delta will be challenging for Russian gas. Long transportation distances will make its delivered cost more expensive than newly signed LNG contracts and will narrow the cost advantage to Central Asian gas. Moreover, Russian gas’ stability is less attractive as the region does not have strong winter heating demand, and there is less concern about gas availability thanks to extensive LNG import infrastructure.
Nevertheless, we expect Russian gas to become part of the Yangtze River Delta’s supply mix. And the region has great potential to become China’s pricing hub due to its various supply options and vast demand.
Note: Wood Mackenzie subscribers can access the full report via the WoodMac portal.