LNG and Pipelines, Russian Gas Goes to China

Beijing plans to increase imports and Moscow aims at becoming its main supplier by 2035. Europe worries: will Russian gas be enough for everyone?

by Evgeny Utkin
03 May 2019
6 min read
by Evgeny Utkin
03 May 2019
6 min read

The increase in gas consumption and imports recorded in China in recent years will continue and Russia’s objective is to become Beijing’s main supplier by 2035.

At the “One Belt One Road” conference held recently in Beijing, China’s leader Xi Jinping met Russian president Vladimir Putin and Gazprom CEO Alexey Miller to discuss the future of the collaboration between their two countries in the energy sector. Putin provided a few details about the meeting during the press conference that followed the event. 

“The volumes required by China, specifically the volumes of natural gas, are increasing; additionally, our Chinese partners are asking us to consider the possibility of increasing supplies through the Power of Siberia pipeline that will become operational at the end of the year. And we will”, the Russian president explained to journalists. Putin emphasized the technical capabilities that allow this, even if the priority of the Russian gas industry is to enter the global LNG market, where it is already having success. 

As the leader of the Kremlin pointed out, China’s natural gas consumption is continuing to grow: +15% in 2017 and +18% in 2018. China has now become the largest gas importer in the world. And by 2035, according to Alexey Miller, Moscow will become Beijing’s main supplier.  “Other two supply projects are also on the agenda: from the far east and from the western route”, said the head of Gazprom. “If these projects are implemented – and Russia is used to implementing almost impeccably its program, at least in the “large project” sector – Gazprom is truly capable of becoming China’s main supplier”. 

The current capacity of Power of Siberia – 38 billion cubic meters per year – will allow to provide a trillion cubic meters of natural gas over the next 30 years, starting with 5 billion cubic meters in 2020 and 10 billion in 2021. Additionally, if needed, Gazprom will meet China’s urgent requests and increase its capacity. Resources, which include two new gas fields in eastern Russia (first of all the large Chayandinskoye gas field, currently under development), allow it.

Will Yamal be enough for everyone?

Alexey Miller said to pay special attention to Russia’s Yamal Peninsula: “It is the richest gas field and will provide consumers with gas for over 100 years.  Therefore, the western route could become the most promising and significant gas transit corridor towards China and Yamal has all that it takes to become a major center for the provision of gas from west to east”. 

Despite Miller’s mention of the importance of both the eastern and western routes (Yamal supplies gas to Europe), to some his words set alarm bells ringing. Until now, Gazprom main priority was the European market. But with the many obstacles to the construction of pipelines, in particular the Nord Stream 2, and Russia’s gas expansion aims in Europe, Gazprom has decided to send a clear message: “The Chinese take all the gas we are able to provide. We will continue to honor current contracts, but obviously if one side asks us to provide gas while the other turns up its nose, we know who we’ll prefer”. The question is: will Russian gas be enough for everyone? The question was first asked in Europe 15 or 20 years ago, and the answer at the time was “yes”. The same answer seems to apply now. 

LNG Sovereignty

At the end of April, two Chinese companies CNOOC and CNPC, each bought 10% of Arctic LNG 2, a new ambitious project by Novatek, Russia’s largest independent gas producer. The same share had been recently bought by Total. As at the moment Novatek wants to maintain a 60% share, it is looking for another partner to acquire another 10%. Therefore, the share distribution becomes similar to that of Yamal LNG, another project by Leonid Mikhelson, president and owner of Novatek, whose shareholders are Novatek, Total and the Chinese companies.  

Considering Yamal LNG (with a capacity of 16.5 million tons of LNG per year), finding another partner for Arctic LNG 2 should not be difficult. Rumor has it that Saudi Arabia and Japan are both interested. Mikhelson said that he may venture in yet another LNG project. Putin showed his support by highlighting the importance of LNG development for Russia. And, naturally, investors and the government have marked his words. 

The point is that the Russian government aims for LNG sovereignty, not in terms of shares, but in terms of technologies. Instead, the Yamal LNG plant was built exclusively with foreign technology, as was Arctic LNG 2, but with more local components. When building the next plant, the Russians want to use their own technology throughout. 

The same applies to gas tanker ships. Yamal LNG Arc7 gas tanker ships – proper icebreaker ships – were designed and built in South Korea. These vessels are extremely expensive, due to their high production costs and scarce availability on the market. This leaves only the class Arc4, which resolve the problem only partially, because these ships are not always available and can be used in a special mode westbound, only during the warm season, or with the assistance of an icebreaker.  

A gas tanker ship class Arc7 costs approximately 330 million dollars, while a regular, non-arctic ship costs 180-200 million. So, Moscow wants to build also its own vessels. But, to save on expensive ships, it has in mind two exchange points, in East Russia, in Kamchatka, and in West Russia, in Murmansk. This way, the gas on the expensive arctic vessels will be transferred onto cheaper vessels, which will take them to their various destinations. Including China, obviously. 

This is how, via pipelines or gas tanker ships, the Russian eagle is preparing to conquer new markets while strengthening its relationship with the Chinese dragon.

The author: Evgeny Utkin

Evgeny Utkin is a journalist and expert on the Russian economy and on energy issues. He works in the Milan editorial office of Quotidiano Energia and contributes to several Italian newspapers (the Russia Oggi supplement of the newspapers la Repubblica and la Stampa) as well as to foreign newspapers (Expert). Before being appointed as an executive of inter-governmental and international companies like Eutelsat and Ericsson, he also worked as Teaching Fellow at the Moscow State University.