A recent briefing paper from Chatham House thoroughly examines natural gas security issues in northeast Asia. The authors assert that northeast Asia will become a major market for gas in the coming decade, led by China, which plans to quadruple its gas demand by 2030. Their conclusion is that closer collaboration between Russian and Chinese national oil companies and a gas importers union between China, Japan and South Korea would support an equitable pipeline deal and lay the foundation for regional energy security.
For Russia, Chinas escalating gas demand presents an unparalleled new market opportunity for its Far Eastern gas production. Russias energy strategy aims at sending 20% of its natural gas exports to the Asia-Pacific market by 2030. As of 2012, the only gas exported eastward came from the 9.6 MMtpy of Sakhalin liquefied natural gas (LNG), mainly destined for Japan.
For Russia to achieve large-scale gas export to Asia, it needs to start developing the super-giant onshore gas fields in East Siberia without delay. But to do this requires securing a market of sufficient size to justify the infrastructure costs.
China is an essential part of the picture but the Russian government is keen to avoid being locked into a relationship with it as the single dominant customer. Russia has therefore pursued a number of LNG and pipeline options that could expand trade with other Asia-Pacific Economic Cooperation (APEC) countries as well as penetrate the Chinese market. Fig. 1 shows the various sources of Russian gas earmarked for Asian markets and transit routes under consideration. It also illustrates the four main gas supply sources for Russias gas exports to Asia: Sakhalin Island, the Sakha Republic (chiefly the Chayanda field), the Irkutsk region (chiefly the Kovykta field) and West Siberia. The earliest production date that Gazprom has projected for the onshore Siberian fields is 2016, but 20172018 currently looks more realistic. On Sakhalin Island, only the Sakhalin II project is producing LNG. The Sakhalin I project and Sakhalin III projects Kirinskoye block and Yuzhno- Kirinskoye block are in preparation for production but require more exploration.
| Fig. 1. Russias Far East gas program.|
Russias Far East program aims to combine two trunk pipelinesSakhalin-Khabarovsk-Vladivostok and Sakha Republic (Chayandagas)-Khabarovsk-Vladivostokto bring more gas eastward. Gazprom plans to export 10 MMtpy of LNG from Vladivostokchiefly to Japanby 2020, with the potential to send more to South Korea, China and beyond.
Gazprom is also under significant political pressure to develop East Siberia and Russias Far East. Immediately after the presidential election in March 2012, President Vladimir Putin urged the company not to ignore the exploration and development of gas resources there. He said that Russia should try to gain a significant share of the global LNG market, focusing first on supplies to promising Asian markets. Gazprom then announced that it would draw up an investment study for Vladivostok LNG in the first quarter of 2013, stating that it considers 20172020 the most favorable period for targeting Asia.
But there is clearly tension between the political priority and the commercial logic. In late October, Putin urged Gazprom Chief Executive Officer Alexei Miller to ensure that work on the trunk gas pipeline from the Chayanda field in the Sakha Republic to Vladivostok began as quickly as possible.
The questions for Russia are how much gas will be able to be marketed as LNG, given that the price may not be competitive enough for Chinas subsidized domestic market, and what volume of sales can be secured through pipeline contracts.
Sino-Russian gas cooperation
In 2006, Russia agreed in principle to supply China with 68 Bcm of its gas over 30 years. However, negotiations between the two parties for a deal to establish the necessary pipelines have been frustrated by disagreements on the linked issues of price and whether to prioritize a western pipeline into Xinjiang or an eastern pipeline into northeastern China.
National development and geopolitical aspirations underpin the position of each party. China wants Russian gas primarily to supply its northeastern provinces of Heilongjiang, Jilin and Liaoning.
Russia favors prioritizing the Altai route from its West Siberian gas fields to western China, which would enable Gazprom to divert its surplus European volume to China. This would effectively make Russia a swing supplier, increasing its ability to use gas as a political bargaining tool with countries such as Ukraine. Gazprom has tried to gain access to Chinas West-East Pipeline (WEP) corridor through a joint investment proposal in the past, but to no avail.
For Russia, Chinas three northeastern provinces offer only a 20-Bcm/y gas market, whereas at least 30 Bcm/y would be needed to justify the development of an eastern pipeline. While Gazprom announced in September 2010 that a legally binding agreement had been reached with CNPC, setting out the commercial parameters for deliveries through the western route, no agreement on the border benchmark price for Russian gas deliveries has been reached to date. HP