New Siberian gas supply adds to China's growing imports

• Published date: 01 December 2019
• DOI: http://doi.org/10.1111/oet.12747
• Date: 01 December 2019

GAS AND POWER

New Siberian gas supply adds to China's growing imports

China is already among the biggest gas importers in the

world—liquefied natural gas (LNG) arrives from many

sources, along with pipeline gas from Central Asia and

Myanmar. In December, the new Power of Siberia line

from Russia's far east will increase import options, while

domestic output is also on the rise. But slower than

expected economic growth and competition from “clean”

coal and renewables, may limit demand growth, increas-

ing competition between sources.

In December, Russia's state-owned Gazprom plans to

start supplying gas to China through the new 3000 km

Power of Siberia pipeline in Russia's far east. PetroChina

has agreed to buy a maximum of 35 bcm/y over 30 years

via the pipeline, with gas sourced from the Irkutsk and

Yakutia production centres in eastern Siberia. Construc-

tion of the $13 bn project was completed well within

schedule, with Gazprom announcing that it had already

filled the pipeline with gas by the end of October.

Construction of the Power of Siberia line was difficult,

as it passes through swampy, mountainous areas, and

has to cope with the extreme environmental conditions

of Siberia. By building it, Gazprom intends not only to

supply gas to China, but also contribute to the social and

economic development of Russia's Far East and gasifica-

tion of the Russian regions.

The new pipeline will join the West–East pipeline,

which imports gas from Turkmenistan to China's north-

western province of Xinjiang (where it connects with

Chinese gas-fields in the Tarim basin) and then on across

China to Shanghai. That line is the longest in the world,

and gas deliveries are understood to be priced slightly

higher than the Power of Siberia line. The Myanmar

pipeline supplies gas to China under a 30-year deal from

the offshore Shwe gas field, with flows beginning into

China's southern Yunnan province in 2013.

Other ways of pipeline gas delivery to China have

been under discussion and one of the new possible sup-

ply routes is the existing Sakhalin—Khabarovsk—

Vladivostok pipeline. However, the bulk of Chinese

imports are in the form of LNG, which comes from many

sources under a variety of pricing methods—in contrast

to the big, formula or fixed price term pipeline contracts.

1|GROWING MARKET; MORE

SUPPLY OPTIONS

China consumed 280 bcm of gas in 2018 (7.4% of the

world's total demand), of which gas imports contributed

90.39 mn tons,

1

or 123 bcm (up 32% on 2017). Between

2018 and 2035 demand is expected to rise by another

300 bcm—stoked by strong economic growth and the

country's push to shift away from coal, according to Petro-

China. However, how much is produced domestically and

how much will come from imports (and the LNG/pipeline

gas split of those imports), is unsure. LNG imports almost

tripled between 2015 and 2018, but have recently seen

growth slow, while domestic output is rising.

In addition, gas still faces stiff competition from

“clean”coal as a fuel for power generation and heating,

along with rapidly expanding wind and solar, as well as

nuclear and hydro, which could eat into growth forecasts.

Moreover, recent signs of slowing economic growth could

lead to downward revisions to energy demand forecasts

more widely, and with so much gas supply in the pipe-

line, this could lead to a glut.

Power of Siberia and other pipeline imports are

currently more costly than the domestic wholesale

benchmark/city gate prices, meaning PetroChina incurs

losses in marketing the fuel. (For imported gas to be eco-

nomical versus alternatives, the price end-users, such as

power plants, pay at their factory gate is capped at 1 to

1.9 yuan/m

3

[$3.8-$7.2/mmBtu]).

LNG prices, on the other hand, vary and are currently

priced at record lows in the northeast Asian spot market,

with levels around $5.20/mmBtu (22 November 2019)—

which could support LNG demand at the expense of a

rapid ramp up in Power of Siberia volumes if prices stay

low, or be squeezed if prices rise again (in the first

9 months of 2019, the average imported price of LNG

was $9.80/mmBtu and $7.30 for pipeline gas, according

to the CSIS

2

—spot prices have since fallen, although not

all Chinese LNG deliveries are priced against spot prices,

while LNG tends to serve coastal markets only).

There may be tougher competition from domestic

sources too—since July 2018, Chinese national energy

8