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China and Europe open competition for Russian gas

The infrastructure for the delivery of energy resources from the Russian Federation to the EU is much larger than in the case of export to the “Celestial Empire”, but Beijing’s prospects are more serious

The period of construction of new gas pipelines from Russia to Europe is almost over. However, in the eastern direction this process will continue further. Does this mean that the EU should worry about the presence of Russian gas in the near future, which may “migrate” to Asia?

China, Mongolia and Russia are developing a new Soyuz Vostok gas pipeline. It will stretch from the Russian Federation to Asian countries. According to Deputy Prime Minister of Mongolia Sainbuyangiin Amarsaykhan, the construction of such a highway can begin in three years.

In essence, we are talking about the creation of Power of Siberia-2. It will even more open the doors of the Chinese energy market for Russian pipeline gas. Talks about a new additional highway to the PRC through Mongolia were conducted back in 2019. It was not entirely clear then whether such a project would be implemented or not.

Now it became clear that the highway will be built for sure. The only question is when and under what conditions. This automatically makes it impossible to increase energy supplies to the EU countries.

It would be a great exaggeration and dilettantism to say that all Russian gas intended for the Old World may eventually migrate to the “Celestial Empire” and other Asian countries. Alas, the infrastructure for delivering energy from Russia to Europe is much more serious than for exporting to China. However, this does not mean at all that the European Union has nothing to worry about. The EU countries will still have problems with the purchase of gas from the Russian Federation. Power of Siberia-2, as an unpleasant bonus, will make them even more serious.

Will China take everything for itself or is it a myth?

Even before the construction of Power of Siberia, however, as well as after its launch in December 2019, many European politicians and experts, even from Asia, said that this project would be a failure.

Power of Siberia will not immediately reach its design capacity in terms of deliveries of 38 billion cubic meters per year. Last year, the contract provided for pumping only 5 billion cubic meters to China. Compared to the volume of gas exports from Russia to Europe, these are crumbs.

Recall that even in 2020, when due to COVID-19 energy consumption in the Old World was minimal, the supply of “blue fuel” from Russia to Europe, including Turkey, amounted to 135.75 billion cubic meters ( data from Gazprom Export).

The past months of 2021 also showed that the volumes of pipeline gas supplies to China are incomparable with those to Europe. The volumes of Russian gas pumped to Gazprom’s main customers in the first quarter of 2021 set a 3-year record. The company supplied 52.7 billion cubic meters to Europe.

Gazprom needs to agree on guaranteed export volumes with China. This is a topic for bargaining for several years. Then you need to sign a transit agreement with Mongolia. If everything goes well, construction will start only in 2024. That means that gas will not flow through this pipeline soon.

It will eventually pump even more than the first gas pipeline to China. In November of this year, the management of PJSC Gazprom even announced that the export capacity of Power of Siberia-2 could exceed the capacity of the first Russian gas pipeline to China by more than 1.3 times.

The dragon from the east cannot be underestimated

The volume of Russian gas supplies clearly speaks in favor of Europe – the current 135.75 billion cubic meters to the EU versus the potential 88 billion to China, and these figures will not appear in a year or two, or even in 5 years.

It would seem, why should the European Union worry? Alas, there really is a reason. The problem is that there are growth prospects for Russian gas exports to China, but in the case of supplies to the EU, they no longer.

Even in the coronavirus-crisis year 2020, when the world first faced the COVID-19 pandemic and reduced energy consumption, the average price of Russian gas in China was $ 150.2 per 1,000 cubic meters. For comparison: in the same year, the average export price of Gazprom to non-CIS countries, including Europe, was $ 143 per 1,000 cubic meters.

China loves to bargain with Russia no less than Europe. Sometimes it is even more difficult to agree on the volume of supplies and the price. The question remains open whether Russia will be able to attract Chinese capital to finance the construction of the Soyuz Vostok.

In the long term, the government and business of the PRC will be glad to increase purchases of gas from the Russian Federation. This became clear especially now, when, during the global energy crisis, it became clear that solar panels and wind energy cannot normally supply the “Celestial Empire” with electricity in adverse weather, which means that a safety net is needed – gas.

The prospects for increasing Russian energy supplies to the EU are very vague. It seems that there have been more gas pipelines in recent years. Nord Stream, Turkish Stream, Nord Stream-2. For some reason there is not enough gas in the Old World, especially now during the energy crisis.

Which one is more attractive?

Russia uses new lines, but at the same time reduces the volume of pumping on old lines. For example, if in 2019 92.3 billion cubic meters were sent to Ukraine (for the transit of part of this volume to the EU), then in 2020 only 55.7 billion cubic meters. The decrease in the volume of pumping through the Ukrainian pipe, in fact, turned out to be surprisingly equal to the size of the throughput of the Turkish Stream.

“At first glance, the European direction of gas exports does not seem as attractive to Russia as the eastern one (China). The reason for this is the active decarbonization process in the EU, coupled with cross-border carbon regulation, which will come into force as early as 2023. The value of the cross-border carbon tax for Russian companies are estimated at approximately $ 3-4.8 billion a year.

LNG from Russia is a lifeline for the EU, however expensive

It should be admitted that despite future difficulties with the supply of pipeline “blue fuel” from the Russian Federation, Europe can safely hope for the import of liquefied gas.

The specifics of LNG trade in the world economy today is such that this product, in contrast to gas pipelines, is more mobile. It is from the mains that the energy carrier gets from point “A” to point “B” and nothing else. But a liquefied gas tanker can always be rerouted from one port to another, where they will pay more for LNG at the moment.

This is clearly seen in the example of the supply of liquefied gas from the United States, which Europe was counting on in 2021, but most of these volumes eventually went to Asia – to a region where LNG was offered at a higher price than in the Old World.

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