Russia’s planning second gas pipeline to China, shifts target market

Russia wants to build a second gas pipeline to China as part of President Putin’s policy of increasing energy exports to Asia. However, completing the project and achieving the goal isn’t going to be that easy.

The pipeline from western Siberia to China is only a short distance away from the Chinese border and the it shares the same deposits that Russia sends to European countries, which allows Russian energy giant OAO Gazprom to switch supplies between the two markets easily.

However, China is less thrilled about the idea. The western route transports gas to the western region of the country which is very far away from the country’s industrial hotspots on the coast.

Therefore if Putin wants a deal to go through they will have to offer very attractive pricing compared to existing exports contracts and Gazprom would have to agree on a discount to get the contract.

Putin and Chinese President Xi Jinping announced a preliminary agreement to build the second Russia-China link two days ago at an economic summit in Beijing.

The pipeline would transport over 30 billion cubic meters of gas a year for 30 years, adding to the 38 billion agreed in the first supply contract. If it goes through then China would be Russia’s number one gas customer, not Germany.

However, the most difficult part of a deal is agreeing on the contract. Putin’s meeting with Xi did not include any price agreement.

The previous contract signed this year is $360 per 1,000 cubic meters, according to Russian officials, which is close to what Germany payed Gazprom last year ($366 per 1,000 cubic meters).

Alexey Miller, Gazprom Chief Executive Officer, said that after signing he hoped a binding contract could be set up in 2015. Deliveries would begin around five years after a final deal is agreed on.

The timing is optimistic if you consider the history of the first pipeline project, Valery Nesterov, an analyst at Sberbank Investment Research in Moscow, told Bloomberg Businessweek, adding that the announcement should be looked at in context of Russia’s tension with Europe because of the crisis in Ukraine.

“It’s more a PR action now, more a war of nerves” with Europe and the U.S., according to Nesterov.

In addition, China already has a pipeline with Turkmenistan, which is going to be expanding. By 2020 China will import 65 billion cubic meters from Turkmenistan (a major Russian competitor).