Russia Proposes New Gas Pipeline Route To China

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Gazprom, the state-controlled energy conglomerate in Russia and the world’s largest natural gas supplier, is planning to propose an agreement with China to build a gas pipeline near the Pacific coast, according to report from Bloomberg.

During a press briefing in Moscow on Monday, Kremlin aide Yuri Ushakov said Gazprom intends to enter into a memorandum of understanding (MOU) to supply gas to China through a pipeline from the country’s Far East region. Gazprom and China are expected to sign the MOU during the two-day visit of Russian President Vladimir Putin to Beijing, which will start on Wednesday,

Gazprom is offering a new deal with China since the negotiation regarding the West Siberian link has been stalled. Last year, Russia entered a $400 billion agreement to supply gas to China from East Siberia.

Pres. Putin is expected to sign 22 agreements with Chinese Pres. Xi Jinping and discuss various issues including trade and economic cooperation during his visit.

Russia expected to become more dependent on China

The Russian state-controlled energy conglomerate wants to follow the $400 billion gas deal with another 30-year agreement to supply 30 billion cubic meters of gas annually to China from West Siberia. According to Ushakov, it is unlikely for China to sign a deal related to the West Siberia gas pipeline during Putin’s visit. The negotiation regarding the contract had been delayed.

Russia is strengthening its energy ties with China to reduce its dependence on Europe. China is expected to become Russia’s biggest gas market surpassing Germany once the supply starts.

Lin Boqiang, director of the Energy Economics Research Center at Xiamen University previously commented that the energy agreement would make Russia more dependent on China both economically and politically.

Russia may offer more than a lower gas price to China

In a note to investors last week, UralSib Capital commented that Russia may have China more than a lower gas price such as a stake in offshore field to strike an agreement wit the Chinese government.

On the other hand, Maxim Moshkov, an energy analyst at UBS Group in Moscow commented that Gazprom a better chance of clinching a deal to supply gas through the Fas Eastern route. According to Moshkov, China is more interested in the Fast Eastern gas pipeline and considered deal less ambitious.

The Yuzhno-Kirinskoye is the biggest gas field of Gazprom in the Far East. The United States imposed sanctions on the gas field, which resulted in limited supplies of equipment and technology.

Prior to the sanctions, Gazprom partnered with Royal Dutch Shell to use the fuel from the Yuzhno-Kirinskoye to produce liquefied natural gas.

Gazprom production expected to decline

A recent report indicated that there is a lingering uncertainty regarding the survivability of Gazprom. Its gas production declined 12.9% during the first two-quarters of 2015.The Ministry of Economic Development of Russia also estimated that the Gazprom’s annual production will drop to 414 billion cubic meters, the lowest level in the history of the company.

Energy experts also predicted that the company’s production will remain low over the next five years. Last year, Gazprom’s production fell 9%.

Aside from production, the company’s export revenue also declined 35.8% to $18.76 billion during the first five months of 2015. Last year, its net income dropped from 1 $34.4 billion in 2013 to $2.8 billion.

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