In September 2019, Russian President Vladimir Putin proposed an alternative route for Russian piped gas to reach China, across Mongolia; this was aimed at breaking the current impasse between the two sides over the long-proposed Power of Siberia-2 pipeline. Previously, the pipeline was proposed for the so-called Altay route, from West Siberia to western China, entering at Xinjiang. The new Power of Siberia-2 pipeline, with 50 Bcm/y capacity, would deliver Russian gas to China at a completely different location, much closer to gas-consuming regions in eastern China, while at the same time still utilizing gas resources from the prolific West Siberian Basin. Total distance in Russia and Mongolia are estimated at 2,600 km and 980 km, respectively. The pipeline distance within China is estimated at only 560 km to the Beijing-Tianjin-Hebei (Jing-Jin-Ji) demand center.

The new route is favorable for Gazprom. Besides the opportunity to export additional Russian gas to China, a direct pipeline connection between West Siberia and the Chinese market provides an important diversification of supply options for Gazprom. The immense gas resources of West Siberia are already known, discovered, or even developed. Currently, this gas flows westward into either the domestic market or is exported to European or neighboring Commonwealth of Independent States markets. Consumption in these markets longer term is expected to remain stagnant or grow very little. In contrast, Chinese consumption is expected to be the major growth engine for global gas demand. The new route also provides an opportunity to monetize some additional gas from fields along the route, mainly in Krasnoyarsk Kray, that would otherwise likely have remained stranded.

We estimate that the current range of a potentially acceptable border price for Gazprom is between $2.7/MMBtu and $4.7/MMBtu excluding export duty. The low end of the range reflects just the cost of gas production in West Siberia and cash opex to operate the export pipeline, while the higher range reflects the export netback from the European market in West Siberia and the required investment tariff to cover the costs of construction for the Power of Siberia-2 pipeline.

On the Chinese side, Power of Siberia 2 would require only a relatively short transmission distance within Chinese territory to bring gas to key demand centers. This clearly threatens other sources of Chinese imports, especially Turkmen gas, as it is among the highest delivered cost, largely owing to high landed price and significant transportation tariff within China. Given our demand growth expectations, Power of Siberia-2 may displace some domestic production and LNG imports and/or create some additional demand depending on its landed costs. Still, China is unlikely to need both Power of Siberia-2 and Central Asia Gas Pipeline Line D for additional Turkmen gas.

A concern for China on the new Power of Siberia-2 route is the approximately 980 km of transit within Mongolia. China's Central Asian gas imports involve external transit, but not via a third-party country that is not also a supplier. Mongolia undoubtedly would be interested in receiving additional revenues from transit and an opportunity to gasify its capital, Ulaanbaatar; Gazprom has worked with many transit situations before, so this is not an insurmountable obstacle. However, third-party international transit naturally increases the risks for project implementation and future operation.

The new pipeline project is still far from reaching a final investment decision (FID). Gazprom launched front-end engineering and design (FEED) work in March 2020, but there are still many more steps that need to be taken to move this project forward. Importantly, we now believe that the project looks sufficiently attractive to all the key participants for it to be included in our base case outlook with first gas arriving in 2031.

Learn more about regional energy markets through the IHS Markit Greater China Gas, Power, and Energy Futures and Russian and Caspian Energy services.

Anna Galtsova is a director of the Russia and Caspian Energy service at IHS Markit.
Tianshi Huang is senior research analyst of the Greater China Gas, Power, and Energy Futures service at IHS Markit.

Posted 16 July 2020

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.