Gazprom helps China to shift from coal to gas

Gazprom helps China to shift from coal to gas

Yesterday, in Beijing, a Gazprom delegation headed by Chairman of the Board Alexei Miller discussed with the Deputy Prime Minister of the State Council of the People's Republic of China, Han Zheng, and the chairman of the Board of CNPC, Wang Yilin, the prospects for energy cooperation. The parties talked about the supply of pipeline gas from Russia to China. Special attention was paid to the preparations for the start of gas supplies along the Eastern route on December 1, 2019. Miller said that in August, the Power of Siberia gas pipeline was connected to the Chayandinskoye field.

Beijing hopes that the Russian pipeline gas will contribute to improving the stability of China’s gas supply and will make an important contribution to the implementation of the PRC’s plans to shift from coal to gas and improve the environmental situation in the country. According to Alexey Miller, "China's gas market continues to grow rapidly, only for the current year, gas consumption in China will increase by a volume comparable to the capacity of the Power of Siberia." At the meeting, the parties also discussed gas supply projects from the Russian Far East along the Western route and cooperation on the underground gas storage projects and gas generation in China.

State-owned oil and gas company CNPC is Gazprom’s main partner in China. In 2014, they signed a 30-year Purchase and Sale Agreement for Russian gas along the Eastern route (via the Power of Siberia gas pipeline). The document provides for the supply to China of 38 billion cubic meters of gas per year. In 2015, Gazprom and CNPC signed an agreement on the basic conditions for pipeline gas supplies from Western Siberian fields to China along the Western route (via the Power of Siberia-2 gas pipeline) and a Memorandum of Understanding on the project for pipeline natural gas supplies to China from the Russian Far East. In 2016, a Memorandum of Understanding was signed on gas storage and electricity generation in China, and on December 2017, an Agreement on the basic conditions for the supply of natural gas from the Russian Far East to China.

Meanwhile, Beijing's economic deal with Gazprom would have another Russian giant petrochemicals company, Sibur, and its oil and gas enterprise Chinese partner, Sinopec, having an Amur plant gas output increase by 80 percent, Business Times writes in the article A Planned Plant For The Chinese Market Of A Russian Petrochemical Giant. Sinopec has a 10 percent stake in Sibur, while another 10 percent is held by China's Silk Road Fund. The Silk Road Fund is state-funded for economic investments in countries along the One Belt, One Road, an economic development initiative covering Eurasia.

The Power of Siberia pipeline, together with the Amur plant and China's funding for Russian liquid natural gas production plants is a sign of the growing business ties between Moscow and Beijing. People knowledgeable with the talks for the forthcoming deal say the preliminary, in-principle agreement, is set to get signed at an economic forum in Vladivostok, Russia next week.

Russia wants to concentrate on its petrochemical industry to increase the value of its hydrocarbon reserves as an alternative from relying on sales of their raw energy products. Sibur and Sinopec already signed a joint agreement in June that would give Sinopec a 40 percent stake which could lead to building a larger plant in Amur. Expansion of the plant to also use LPG would raise the project's costs from an estimated $7bn-$8bn to $10bn-$11bn.

China is one of the largest consumers and importers of LPG. Russia's Irkutsk Oil (INK) shipped 2,300 tons of propane and butane mixture to China in just over 10 days. According to Chinese customs, the country's LPG imports rose to 9.79 million tons, with a growth rate of 3.4 percent year-on-year in the first half of 2019.

Terms of the Chinese and Russian deal would have Gazprom not only supplying the Amur plant with 2m tons of ethane a year, but it would also supply 1.1m-1.5m tons of LPG. Russia's government applying a negative excise tax on LPG would greatly influence Sibur's investment decision on the size of the Amur plant.

The first route to supply Russian gas to China is the Gazprom's Power of Siberia pipeline set to open in December. Both LPG and ethane would be refined from Siberian natural gas pumped through this pipeline. Finalization of a decision on the Gazprom-China deal will be before the end of 2019 with construction to last until 2024.

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