• 2014 October 7

    Is Power of Siberia powerful enough?

    Analysts are skeptical about the prospects of Russia’s gas supplies from the Siberian fields including the prospects of LNG plant in Vladivostok. Experts forecast it to be too expensive to compete with gas from Australia and other countries. In this context, Gazprom is set to promote the development of domestic demand for gas as motor fuel.

    Gazprom is going to use the Power of Siberia gas transmission system for conveying of gas from the Yakutia and Irkutsk gas production centers to Khabarovsk and then to the port of Vladivostok where an LNG plant is to be built. Vladivostok can also be supplied with gas by the existing pipelines from Sakhalin fields (Sakhalin I-III projects). The Power of Siberia is to be nearly 4,000 kilometers long.  Its construction is to be completed by the end of 2017. Under the project, it will also ensure gas supplies to China.

    Also, there is a project on linking the above gas production centers to the pipelines running to the European part of Russia and then to Europe. So, Gazprom is going to diversify gas supplies making it possible to export gas to China, Japan and, if necessary, to Europe. 

    The political aspect of the ‘Eastern direction’ is evident amid the worsening relations with Europe. According to Alexander Pasechnik, head of the analytical department of the National Energy Security fund, “Gazprom has also embarked on a course of sales markets diversification with the strategy focused on the east, which should be better realized by the Europeans. In the future, east-west balance of supplies expected in the 30-ies can feature the preference given by the Russian Federation to APR countries, which are less politically charged as compared with Europe”.

    Nevertheless, some analysts are skeptical about economical viability of that grand project as a whole. Remoteness of the Yakutia/Irkutsk centers from the seaports and the consumer countries is a challenge resulting in high cost price of the gas. 

    As Mikhail Krutikhin, partner of consulting company RusEnergy, said at the 4th Yamal & Kara Sea Oil & Gas Conference in Moscow, Russian gas is not crucial for China as this country has diversified gas sources while widely discussed gas contract between Russia and China does not ensure real load. 

    As for Mikhail Krutikhin’s estimates of gas supplies via Vladivostok LNG, it will cost $16 per million BTUs even with tax preferences, while in Japan it is to cost $12-$14 per million BTUs. So, the project does not seem to be economically viable especially amid LNG production forecasts in Australia, Canada and the USA featuring much higher profitability.

    He is also sceptical about the prospects for Yakutia/Irkutsk gas exports to Europe considering a too long “transportation leg”.

    Nevertheless, the project entered the investment stage in February 2013 . March saw the approval of an Action Plan regarding the construction of LNG plant near Vladivostok as well as an Action Plan regarding the resource base of the project. A special-purpose company – Gazprom LNG Vladivostok – was set up to implement the project. 

    The plant is supposed to have three process trains with the annual capacity of 5 mln t of LNG each. The first process train will be put onstream in 2018. We think the project is not likely to move beyond the first train and seems to be focused on liquefaction of Sakhalin gas alone. The project implementation is based on political reasons to demonstrate the ‘turn towards Asia’ rather than on economical reasons.

    Anyway, something should be done with the Siberian gas and Gazprom has therefore enhanced the discussion about wider use of natural gas as motor fuel in Russia. In particular, the Company is going to build a gas pipeline to Crimea. This would partially substitute oil products the supply of which to the peninsula is limited by the capacity of the Kerch Strait crossing. Read more in our previous materials >>>>. Meanwhile, Saint-Petersburg will soon host a conference dedicated to the prospects of gas as engine fuel in Russia.

    Vitaly Chernov