Gazprom to make first weld on 'Power of Siberia' pipeline

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Russian gas company Gazprom is preparing to make the first weld on the Power of Siberia pipeline – the 4,000 kilometre backbone of its ambitious Eastern Gas Programme. The programme involves developing new production centres to supply gas to eastern Russia, to a proposed LNG project at Vladivostok, and Russia’s first pipeline gas exports to China, following the contract agreed in May.

The first batch of steel pipes has just been delivered to Lensk in Yakutia (see photo above). It consists of 260 pipes, each 1.42 metres in diameter with a wall thickness of 21.7 mm, together weighing a total of 2,400 tonnes. By the end of the year Gazprom expects to have delivered over 120,000 tonnes of piping.

Gazprom has a number of projects in eastern Russia, including the Sakhalin Energy LNG project, the recently commissioned Kirinskoye field and a new pipeline running from Sakhalin to Vladivostok, via Khabarovsk. However, for the full $55 billion Eastern Gas Programme to be economic, Gazprom needed to finalise its export contract to China.

Breakthrough deal: The big breakthrough came in May when Gazprom Chairman Alexey Miller and the Chairman of China National Petroleum Corporation (CNPC), Zhou Jiping signed the historic trade deal – in the presence of Russia’s President, Vladimir Putin, and China’s President, Xi Jinping. Negotiations had dragged on for more than a decade, with many false dawns and with pricing being the main sticking point.

The deal signed in May is for 38 Bcm/year, starting in 2019, on take-or-pay terms, at an oil-linked price estimated to be around $10/MMBtu. Gas is to be supplied via the eastern of two proposed routes (see map), with a deal for exports via the proposed western route still a distant prospect. Just days after the signing of the export deal with China, Miller signed an order to begin implementation of the projects needed to fulfill that deal – but the 2019 deadline nevertheless looks challenging.

GAZPROM’S EASTERN GAS PROGRAMME – Gazprom is currently working on ambitious schemes to develop new gas production centres and transmission pipelines in the eastern part of the country. The priorities will be to supply Russian customers, then to construct an LNG plant at Vladivostok, and then to export gas by pipeline to China.

The Power of Siberia pipeline will transport gas from new production centres in Yakutia (the Chayandinskoye field) and Irkutsk (the Kovyktinskoye field) eastwards into China, at Blagoveshchensk, and onwards to Vladivostok, to supply the proposed LNG project. Gazprom intends to bring the first 5 million tonne/year train on stream in 2018 and the second in 2020.

The Chayandinskoye oil, gas and condensate field is the cornerstone for the Yakutia gas production centre. It has recoverable reserves of 1.45 Tcm of gas and some 93 million tonnes of liquid hydrocarbons. At full capacity it will produce up to 25 Bcm/year of gas and 1.5 million tonnes/years of oil.

Gazprom’s existing gas projects in far-eastern Russia, notably on and offshore Sakhalin island, will be tied into the overall system by Power of Siberia and the Sakhalin-Khabarovsk-Vladivostok gas transmission system.

Gazprom has been talking about developing its natural gas resources in the eastern part of the country for the best part of two decades, for both domestic supply and to export gas to Asia. However, until recently, it was doing very well out of exporting gas to Europe, where it was getting good – oil-indexed – prices and where demand growth seemed inexorable. Three major developments have called these demand and pricing assumptions into question.

One was the economic crisis that Europe suffered following the global economic downturn that took hold in 2008, which had a big impact on demand for natural gas.

Another has been the development of climate and energy policies that have boosted investment in subsidised renewable energy sources.

The third development has been the shale gas production boom in the United States. LNG originally targeted at the US instead found its way to Europe, putting pressure on gas pricing mechanisms in Europe. At the same time, cheap gas displaced coal from power generation in the US, leading to a glut of cheap US coal, which has been displacing gas from Europe’s power generation fuel mix.

More recently, the dispute between Russia and western powers over Ukraine has led to concerns about Europe’s overdependence on Russian gas.

There are now moves in Europe to diversify supplies and, in some countries, to reduce dependence on gas over the long term. This has exacerbated Russia’s need to find new export markets for its gas.

Pollution concerns: China’s reasons for wanting the deal were just as compelling as Russia’s. Reducing coal consumption growth has become a priority for the government because it has come under increasing pressure to address the negative environmental effect of coal use, particularly air pollution.

A key part of the strategy is to increase the use of natural gas, demand for which is growing at an accelerating rate – much faster than China’s current capability to grow its indigenous production.

By Alex Forbes

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