The Western Route of Sino-Russia gas pipeline

Date:  2016-04-21  Author: Li Lifan   

Till September of this year, nearly 20 months by taking Western sanctions to Russia, the relationship between Russia, the United States and Europe almost into a “new Cold War.‘ In late this July, the Russian media had focused on postpone indefinitely the western route of natural gas pipeline project. Despite Gazprom finally cleared ,that China and Russia has still engaging on the West Route Project with maintaining close communication. But economically  and geopolitically, this rumor is not fiction. Brent oil prices plummeted at US $107 / barrel in June 2014, and dropped onto $53 / barrel at the beginning in July this year, and all believed that $50 / barrel price will remain for some time or even much lower than this; natural gas prices over the same period was quickly down from $4.5 to $2.779 / MMBTU, while the average pipeline price of gas in Gazprom in  2014 was $372.4 / thousand cubic meters, equivalent to $11.6 / MMBTU. In this context, export revenues of Gazprom plummeted. If this market until 2018, Gazprom will be hard-pressed to invest in new projects. Global demand for natural gas has grown, China will become a big gas market. To 2035, China will have a demand of 400 billion cubic meters for his market as the same size of the European market on nature gas. The deal of 30-year exports to China with totally 38 billion cubic meters of natural gas agreement signed in May 2014, this total length of 3170 km of natural gas pipeline has scheduled to be built from the Heihe to Shanghai in the Chinese territory, as the most longest pipeline in Asia. Pipeline construction is expected to be completed in 2018, Russia will build nine underground gas storage in the vicinity of the Chinese section alongside of the pipeline.
What changes with oil at $50?
The reality is not so optimistic, the deal was announced, when a barrel of oil cost about $100; and in recent days, its price is only $50 hovering. Since the price of crude oil and gas prices is the root-bound, and future uncertainties, such as the payment mode, ability to pay and the initial investment, etc., for the implementation of Chinese-Russian gas contracts marked a shadow. From August 2015 with the Chinese RMB against the US dollar exchange rate had declined, coupled with the stock market and real estate market has been normally volatility, some people think the current Chinese economy is in a bad situation. A slight depreciation of the RMB against the US decision has re-regulated and approached a certain reform of the exchange rate system, the volatility of the stock market was a relevant adjustment of the original state of irrational investment. It must have some influence on the Chinese economy in the short term; which certainly gas cooperation with Russia will accelerate the friction between the two sides. As international oil prices and the economic slowdown in China, the Chinese-Russian gas cooperation has been conceived not as good as in before smoothly. August 26, 2015, Russia's biggest natural gas supplier Gazprom hinted that Gazprom began to supply natural gas to China has extended to 2019 as for two years later from the previously announcement. Differences between the two sides in the future implementation of the contract will be more intense. Not just because of Ukraine, the Russian suffered economic sanctions from European countries, Also alliance building with China as for its Eastern Pivot, Russian strategic shift to the East. But how to cooperate with China, Russia has its own considerations. Gas marketing strategy will be successful or postponed indefinitely?
One of the largest target markets for Russian gas
First, China is able to become a major gas markets in Russia. Russia still hopes to stop the supply of natural gas to Europe through Ukraine in 2019. For this reason, Russia is seeking to transit gas pipeline to Turkey and increase access to the Baltic Sea Nord Stream two networks (Baltic Nord Stream Network) of new gas pipelines, gas transmission capacity could reach the highest in Europe, the project the total cost will reach about $25.4 billion. Which was clear, Russia did not completely abandon the European market. Secondly, Gazprom's ability to carry out the contract with China. Russia and China signed a gas contract, worth $400 billion in 2014, and provides natural gas prices will be linked to a basket of oil products baseline. However, after the signature of contract, the international oil price has fallen more than 50%. The uncertainty of natural gas prices, Gazprom will face up the budget deficit over such investment, while Gazprom’s market value had rapid declined since 2008. Till  in early August 2015, its market value has evaporated over $300 billion, remaining $51 billion. The Russian government is now unable to recapitalize Gazprom, though Gazprom has been carrying out the wishes of Putin. Finally, if there is the will China continue to strengthen cooperation with Russia in the gas. The economic slowdown of China reduced the certain demand for natural gas, while Australia and other countries increased the supply of liquefied natural gas (LNG) in beginning of this year . The first half of 2015 natural gas production 65.6 billion cubic meters in China, an increase of 3.8%. The natural gas’s consumption was 90.6 billion cubic meters in the first of this year, an increase of 2.1 percent, the growth rate is not expected to rise 10 percent. Moreover, China insists supplying the gas from the eastern route by the end of 2018 , the Western Route for supplying the gas will not be changed at the line late in 2020 as for the basic principal determined by CNPC.

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