Sino-Russian Gas Cooperation:
The Reality and its Global Implications
Prepared for
London School of Economics
(LSE) Seminar
May 7, 2013
By
Dr. Keun-Wook Paik
Senior Research Fellow
1
Sino-Russian Gas Cooperation
• In Feb 1997, Gazprom CEO, Rem Vyakhirev’s Asian Policy
announced.
• In Aug 1998, The Bolshekhetskaya Cavity region of West Siberia, with
3 tcm of natural gas reserves.
• In June 2003 Gazprom CEO Alexei Miller’s key note speech at the
22nd World Gas Conference gave a strong hint gas production from
East Siberia and Sakhalin Islands would be 26 bcm in 2010, and the
figure could reach to 110 bcm in 2020. Miller’s speech also indicated
two LNG plants at Vladivostok and Vanino, in addition to Korsakov in
Sakhalin Islands. It was the core of Eastern UGSS.
• In Autumn 2004, the so-called ‘Discussion Package for the
Interagency Working Group to develop a Programme for creating a
Unified Gas Production, Transportation and Supply System in Eastern
Siberia and the Far East with potential exports to markets in China and
other countries in Asia and the Pacific’ was revealed.
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• In Oct 2004, Gazprom and CNPC have agreed to sign a strategic
partnership agreement in Beijing.
• In March 2006 a memorandum between Gazprom and CNPC on natural
gas supplies and construction of two gas pipelines (with a capacity of
60-80 bcm/y) was signed.
• In Sep 2007, Energy Minister Khristenko, signed the approval order
(no. 340) creating the Eastern Gas Programme (EGP).
• In July 2009 Gazprom commenced the exploration drilling in Kirinskoye
field, and Khabarovsk hosted the celebrations dedicated to welding the
first joint of the Sakhalin–Khabarovsk–Vladivostok (SKV) gas
transmission system. The 1st stage of SKV project was completed in
Sep 2011.
• Since the Beijing announcement in March 2006, no progress on the
gas price negotiation was made, except the general price formula
agreement. Consequently the overly advertised St. Petersburg’s price
deal in June 2011 produced no result due to the huge price gap between
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the two sides.
Source : Gazprom
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China’s Gas Expansion and Its Supply alternatives
China’s gas industry witnessed a massive expansion during the last
ten years. During 2000-2009, China’s gas consumption increased from
24.5 bcm to 88.7 bcm, with annual growth rate of 15.4%.
According to NEA, China’s gas demand in 2010 was 110 bcm, of which
94.5 bcm covered by domestic production. The figure in 2011 was
projected to be 130 bcm and 110 bcm respectively.
In 2010, NEA projected that the demand in 2015 will reach to 260 bcm,
or 8.3% of China’s primary energy mix.
Right after the 12th FYP (2011-2015) announcement, ERI suggested
China’s natural gas supply by 2015 will be 230-240 bcm/y, of which 150
bcm/y by domestic production, 30 bcm/y by LNG and 50 bcm/y by
pipeline gas. Wood MacKenzie projected that China’s gas demand will
reach to 444 bcm in 2030, with an annual growth rate of 7.5%, with
strongest growth pre 2020.
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China’s Energy Industry Bureaucracy : gas sector
• The most important ministry for China’s Oil and Gas Industry under
the Chinese Cabinet : National Development and Reform Commission
(NDRC).
• China’s Gas Price Reform is up to the Price Department of NDRC.
• As far as China’s Trans-national Pipeline Development is concerned,
CNPC has the exclusive mandate for negotiation and implementation
From NDRC.
• There were five entities – PetroChina, SINOPEC, CNOOC, China Gas
and ENN - that had been authorised by NDRC for the long term LNG
supply contract. In Feb 2012, however, reportedly NDRC had lifted
restrictions on the construction of LNG terminals, permitting "any
company" to build such projects as long as they have signed a longterm contract to import more than 1 mt/y of LNG.
• The Ministry of Land and Resources is very aggressively pursuing
the shale gas revolution in China but without active role of Chinese
NOCs, the result will not be impressive.
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China Gas Production
In July 2009, Jia Chengzao, chairman of the Chinese Petroleum Society strongly
Indicated China’s gas production capacity will reach to 250 bcm/y by 2030, and
Consequently China has to import 150 bcm/y of gas to cover the 400 bcm/y gas
demand by 2030.
In May 2010, Jie Mingxun, president of CBM Company under PetroChina made
a projection that by 2020 China’s gas production will reach to 202 bcm, of which
62 bcm – tight gas 30 bcm, CBM 20 bcm, and shale gas 12 bcm – will be covered
by unconventional gas production. In other words, conventional gas production
will be 140 bcm by 2020. (Dec 2010, CNPC revised this figure to 210 bcm by 2020)
In March 2011, right after the 12th FYP (2011-2015) announcement, Energy
Research Institute (ERI) under NDRC suggested China’s natural gas supply by
2015 would be 230-240 bcm/y, of which 150 bcm/y by domestic production,
30 bcm/y by LNG and 50 bcm/y by pipeline gas.
In late Feb 2012, Xu Yongfa, president of CNPC Economics & Technology
Research Institute said China will increase natural gas output to 200 bcm/y
by 2020, adding that the role of gas in the national energy mix is projected to
reach 8 percent by 2015, 10 percent by 2020 and 12 percent by 2030.
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As of 2010, there were three major gas production bases under CNPC.
The first is Changqing field, Ordos basin, with 21 bcm/y ; the second is
Tarim field, Tarim basin, with 18 bcm/y ; the third is Sichuan field, Sichuan
Basin, with 15 bcm/y.
Three main Basins :
• Tarim basin : Kela 2 (284 bcm), Dina 2 (175 bcm) and Dabei 3 (130 bcm)
are the flagship fields.
• Ordos basin : Sulige 6, projected production of 35 bcm/y by 2015.
• Sichuan basin : Longgang (700-750 bcm), and Puguang (405 bcm) are the
flagship fields. Recent discovery of Yuanba field will add 6 bcm/y by 2015.
According to NEA’s CBM industry’s development plan for 2011-2015 period,
China’s CBM is projected to reach 20-24 bcm by the end of 2015, of which
10-11 bcm from surface well and 11-13 bcm from underground sources. This
target figure was reconfirmed by NDRC’s 12th FYP plans. The draft plans
envisages 21.5-23.5 bcm/y production by 2015. (Dec 2011)
China’s 12th FYP (2011-2015) for shale gas development plan, China aims at
boosting its annual shale gas production to 6.5 bcm/y by 2015 and 80 bcm/y
by 2020. (Dec 2011) the figure became 60-100 bcm by 2020. (March 2012)
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Table 6. China’s Gas Demand Projection
2005
2010
unit : bcm/y
2015
2020
63.7
106.8
153.4
CNPC
2002
CNPC
2006
CNPC
2009/10
300.0
CNPC
2011
350.0
120.0
Sinopec 2006
ERI
2002
ERI
200.0
140.0
64.5
120.0
210.7
240.0
160.0
200.0
2010
200.0
300.0
ERI
2011
230-40
NEA
2010
260
Xinhua
2010
Cnooc
2002
270-300
61.0
100.0
150.0
200.0
Source : K-W Paik, Sino-Russian Oil and Gas Cooperation
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Table 7. CNPC’s Gas Demand Projection : 2010 vs 2011
unit : bcm
RS
2010
2015
2020
2025
2030
2010
119.9
231.1
297.3
350.7
392.4
2011
129.0
350.0
500.0
2012
550.0
HGS
2010
126.0
242.4
317.5
384.2
438.0
LGS
2010
114.6
218.7
279.2
315.6
341.1
Note : RS means Reference Scenario ; HGS means High Growth Scenario ; LGS means
Low Growth Scenario
Source : CNPC
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China’s WEP Corridor Development
The driving force of China’s natural gas expansion is WEP corridor
Development. CNPC started the planning and study of WEP 1 project
in 1996, and two years later the preliminary FS was submitted. The
overall plan of WEP 1 was completed by 2000.
The State Council requested SDPC (now NDRC) to set up a working
group before the end of March 2000. A conference titled “West Gas
Transport East” was organised by SDPC during March 24-26, 2000.
Gov’t bodies like SDPC, SETC, MOF, MLNR, SAPC, SPC, CNPC,
SINOPEC, CNOOC, and CIECC + Xinjiang, Gansu, Ningxia, Shaanxi,
Shanxi, Anhui, Jiangsu, Henan provinces, Shanghai Municipality +
State financial institutions like PBOC, BOC, SDB, ICBC and CBC
attended the conference.
WEP 1 project was state level commitment to accelerate the economic
development of remote western part of China to reduce the wealth gap
between the prospering coastal provinces and the interior areas. CNPC
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was mandated to implement the development.
Driven by urgent necessity of WEP 1 expansion (from 12/y to 17 bcm/y),
WEP II proposal was officially presented in the draft of Guidelines for
11th FYP (2006-2011).
In Dec 2009, Central Asia-China Gas pipeline and the western segment
of WEP II were put into operation, and in June 2011 the construction of
the infrastructure for the major line of WEP II with a total distance of
8,653 km and a total budget of 142.2 bn yuan (US$ 21.9 bn) was
completed.
WEP III plan was mentioned during 2007- 08 period, and WEP IV was
mentioned for the first time in 2009. In April 2010, Chinese government
announced that the western section of WEP III is scheduled to start
operation in 2012 and the eastern section from 2014.
In April 2011, NEA said construction of WEP III, IV and V will start during
12th FYP (2011 – 2016). However, the announcement of increase of gas
import for Turkmenistan from 30 bcm/y to 65 bcm/y indicates that the
chance for Altai gas via WEP III is virtually nil.
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13
CNPC’s preference of Central Asian Gas Supply
The critical difference between Russia and Central Asian Republics with
regard to gas supply to China is whether the value chain business is
allowed or not. For example, Turkmenistan allowed CNPC to explore
and develop its gas fields, while Russia completely ruled it out. The
availability of “Equity Gas” option gave CNPC enough of a cushion to
balance the burden from the high border export price.
This is the reason why CNPC has secured as much as 100 bcm/y of gas
supply from Turkmenistan, Uzbekistan, and Kazakhstan.
In fact, importing relatively a small scale pipeline gas from Turkmenistan
incurred CNPC around US$ 0.8 bn loss in 2010. CNPC has to find a way
subsidize these loss from the pipeline gas import, and this is the reason
why NDRC’s Pricing Department did not give a green light on CNPC’s
price negotiations with Gazprom. If China’s domestic gas price reform
can be implemented, CNPC would not need to drag its feet for the
tedious gas price negotiation with Gazprom. The chance is not so high as
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the price reform will go through the step by step approach.
Figure
Map 1.17 - THE EAST ASIAN "GRAND DESIGN"
BASINS
D Irkutsk
E Sakha (Yakutsk)
F Krasnoyarsk
G Sakhalin
H West Siberian Fields
PIPELINES
1 West/East Pipeline
2 Irkutsk-Beijing
3 Long Term Russian Plan
4 Sakhalin/Japan
5 Japanese Trunk Line
6 Turkmenistan/China
7 Kazakhstan/Bhina
H
3
3
F 3
J
E
D
2
7
G
3
4
3
I
6
5
1
C
B
A
BASINS
I Dauletabad (Turkmenistan)
J Karachaganak (Kazakhstan)
Distance From New
York to San Francisco
For Reference
BASINS
A Szechuan
B Ordos
C Tarim
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China’s LNG Expansion
As of 2011, China has five LNG receiving terminals with the capacity of
17 mt/y at Guangdong, Fujian, Shanghai, Liaoning, and Jiangsu provinces.
By 2015 China is set to have 10 LNG import terminals in operation with
30-35 mt/y import volume. Many of the 60 or so LNG carriers that will be
required by 2020 to meet China’s LNG needs will be built in China’s
domestic shipyards.
In early March 2012 CNOOC’s proposed Tianjin floating storage and
regasification unit (FSRU), China’s first offshore LNG terminal was
preliminarily approved by NEA. This is a very significant initiative by
CNOOC as the Tianjin FSRU became the first terminal above Shanghia
by CNOOC. It was the territory dominated by CNPC and SINOPEC.
If the second stage LNG terminal development is made during 2016-2020,
China’s coastal provinces will have at least 60 mt/y of LNG import capacity
by 2020. However, the decision on the expansion will be heavily affected
by the result of shale gas development in China during the 2016-2020 and
the projected LNG import price.
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Table 10. China’s LNG Import Projects
1st / 2nd
mpta
Operat Company / Status
ion
time
Guangdong Dapeng
3.7 / 3.3
2006
CNOOC / Operation
Fujian Futian
2.6 / 3.4
2009
CNOOC / Operation
Shanghai Yangshan
3.0 / 3.0
2009
CNOOC / Operation
Liaoning Dalian
3.0 / 3.0
2011
CNPC / Operation
Jiangsu Rudong
3.5 / 3.0
2011
CNPC / Operation
Zhejiang Ningbo
3.0 / 6.0
2012
CNOOC / Under Const
Hebei Tangshan
3.5 / 3.0
2013
CNPC / Under Const
Guangdong Zhuhai
3.5 / 3.5
2013
CNOOC / Under Const
Shandong Qingdao
3.0 / 3.0
2013
SINOPEC / Under Const
Sub-Total
28.8/60.0
Hainan Yangpu
3.0 / 3.0
2014
CNOOC / Proposed
Guangxi Tieshan
3.0 / 3.0
2015
SINOPEC / planned
Total
34.8/66.0
Source : K-W Paik, Sino-Russian Oil and Gas Cooperation
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Summary I
Sino-Russian gas cooperation in the first half decade of the century was so
limited because Russia tried to replicate its experience with oil exports, but
found China unwilling to agree. This unwillingness was due to four main factors
:
i)Russia refused to allow equity in fields or pipeline projects, and therefore
refused China any control in the value chain, which is what the Chinese wanted;
ii) Russia demanded unattractively high prices ;
iii) China had alternative import options (the Central Asian Republics, Myanmar,
and LNG imports) as well as the potential to expand domestic production ;
iv) There was a lack of trust on both sides.
Russia wanted to avoid depending completely on China as a market, and China
wanted to avoid over-dependence on Russia as a source of supply. This failure
of the price negotiations is a reflection of all of these problems.
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Table 11. The Characteristics of China’s Central Asian Model and
Russian Model.
Central Asian Model
Russian Model
Oil Sector
• Oil asset buyout or oil
company buyout in
Kazakhstan
• “Loan for oil” : 2005 &
2009.
• Oil company buyout
(2006, Udmurtneft)
• Upstream JV (Vostok
Energy) allowed.
Natural Gas
Sector
• “Equity Gas” in
Turkmenistan and
Uzbekistan
• Pipeline Construction
• Value Chain business
No Equity Gas in upstream
and mid-stream allowed.
But “Loan for Gas” option
between Gazprom and
CNPC was explored in
2011.
Source : K-W Paik, Sino-Russian Oil and Gas Cooperation.
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Table 12. Sino-Russian Oil and Gas Trading Projection
unit : mt/y & bcm/y
2020
2030
Oil
Gas
Oil
Gas
Business as
usual scenario
25-30
30
25-30
40
Optimistic
scenario
30-35
68
40-45
68
15
0
15
20
Pessimistic
scenario
Source : K-W Paik, Sino-Russian Oil and Gas Cooperation.
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Update of Sino-Russian Gas Cooperation :
Since St. Petersburg summit meeting in June 2011, Beijing authority has made
some efforts not to lose the momentum of Sino-Russian gas cooperation.
During the visit to Moscow in late April 2012, then deputy premier Li Kechang’s
delegation made very clear that China is interested in taking upstream equity
stake in East Siberia’s gas development.
In early June 2012, during World Gas Congress in Malaysia, Gazprom Export
CEO Alexander Medvedev has spoken of a mysterious “asset swap” that could
finally break the deadlock over the company's proposed 68 bcm/y gas-supply
deal with China. In return for a highly desired upstream role for CNPC in
Russia, Gazprom could win access to the massive Chinese gas distribution
market.
In early Dec 2012, Russia’s deputy premier Arkady Dvorkovich confirmed that
Russia was reviewing the Chinese proposals on advance payments under
contracts.
In March 2013, Moscow summit between President Xi Jinping and President
Putin announced that the priority will be given to the Eastern Route with 38
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bcm/y supply capacity.
Source : CNPC (2012)
22
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Source : Gazprom
Background Explanation :
A string of reports that Gazprom’s monopoly position of gas export was
fundamentally challenged by both Novatek’s Yamal LNG project and
Rosneft’s Arctic LNG export scheme.
After Igor Sechin’s visit to Beijing in Feb 2013, Gazprom CEO Alexei Miller
visited Beijing on March 13, 2013 and announced that special focus was
laid on key commercial and technical parameters of pipeline gas supplies to
China, particularly, from the Power of Siberia gas pipeline. It added that joint
efforts had been ramped up to sign a contract for Russian gas supply to
China in 2013.
However, one day later (March 14) CNPC announced that it took 20% of equity
of ENI’s Mozambique offshore project with 75 tcf proven gas reserves, with
the payment of US$ 4.2 bn.
This was an indirect confirmation by CNPC that until the final breakthrough
is made, CNPC will open all options open as the financial burden of the large
scale LNG imports in the coming years will be too big, without the sizable
upstream equity buy-out. It is a very clear message to Gazprom.
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Useful Reference :
Keun-Wook Paik, Sino-Russian Oil and Gas Cooperation : The Reality
and Implications (Oxford : Oxford University Press, 2012).
http://www.naturalgaseurope.com/sino-russian-energy-cooperationkeun-wookpaik?utm_source=Natural+Gas+Europe+Newsletter&utm_campaign=409
7141029-RSS_EMAIL_CAMPAIGN&utm_medium=email
http://www.eastasiaforum.org/2013/01/19/sino-russian-gas-cooperationthe-reality-and-implications/
http://www.chathamhouse.org/sites/default/files/public/Research/Energy,
%20Environment%20and%20Development/1212bp_paik.pdf
http://interfaxenergy.com/natural-gas-news-analysis/asia-pacific/russiachina-pipeline-success-hinges-on-japan/
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