Landmark Siberian gas to test CNPC's marketing mettle in China's backwaters

Hong Kong and China Gas

02/12/2019 02:02

(Repeats earlier story for wider readership with no change to
text)
    * 'Power of Siberia' to bring piped Russian gas to China
    * Cements ties, opens new market for Siberian gas 
    * Pipeline far from key industrial gas user base

    By Muyu Xu, Chen Aizhu and Olesya Astakhova
    HARBIN, China/SINGAPORE/MOSCOW, Nov 29 (Reuters) - Across
China's coal-burning northeastern provinces, pipelines are being
laid, contracts signed and coal-fired boilers ripped out ahead
of the arrival next week of the country's first piped natural
gas from Russia.
    The 'Power of Siberia' pipeline, due to open on Dec. 2, will
pipe natural gas around 3,000 km (1,865 miles) from Russia's
Siberian fields to the fading industrial region, which has
lagged the push to gas in China's south and east.
    The pipeline - which will deliver gas under a 30-year, $400
billion deal signed in 2014 - has the potential to transform
northeast China's energy landscape and even slow the country's
surging imports of liquefied natural gas (LNG).
    It will also make Russia a key supplier to China, to rival
Turkmenistan and Australia, boosting ties amid Beijing's trade
war with the United States.
    More immediately, it poses a challenge for the sole marketer
of the gas, China National Petroleum Corp (CNPC), or PetroChina,
as it looks to drum up demand in the relatively sparsely
populated region that has relied on coal for heating during
sub-zero winters.
    The pipeline will emerge in Heilongjiang, which borders
Russia, and feed on to Jilin and Liaoning, China's top grain
hub, where rust belt industries have long been overshadowed
elsewhere.
    The region's industry and 68 million city dwellers consume
just 14 billion cubic meters (bcm) of gas a year, well below the
38 bcm the pipeline will deliver at full capacity by 2025. 
    Russia's Gazprom  GAZP.MM  has said it expects to supply 4.6
bcm in 2020, rising to 10 bcm in 2021, 16 bcm in 2022, 21 bcm in
2023 and 25 bcm in 2024.
    With local power prices capped by authorities to support
manufacturing, and cheaper imported coal available via
Liaoning's Dalian port, CNPC faces a tough task to sell gas.
    "It will take a long time to nurture a market in the
northeast where gas-fired power generation barely exists and the
industrial sector is weak," said Li Yao, chief executive of
consultancy SIA Energy.
    "With no take-or-pay contracts in place (domestically), CNPC
shoulders most of the marketing risk."
   
    PRICE TAKER, LOSS MAKER
    Neither PetroChina nor Gazprom has revealed the gas pricing
terms, but Beijing-based analysts said the price is linked to
crude oil or a basket of competing fuels.
    Ling Xiao, a PetroChina vice president in charge of gas
marketing, said last month Siberian supplies would be priced
"slightly lower" than piped imports from Turkmenistan, but the
company "will still be making a loss as (the price) exceeds that
of domestic city-gate benchmark rates."  urn:newsml:reuters.com:*:nL3N27F1JL
    Several Russian gas industry sources said the pricing could
be revised down as volumes increase due to a fall in global oil
prices from around $100 a barrel when the deal was signed to
around $60 now. 
    However, the pricing formula remains known by only a few due
to its commercial sensitivity, according to one source. Gazprom
said it will not comment on pricing.
    PetroChina declined to comment on the pipeline or its plans
to boost gas take-up.    
    However the company, which supplies 70% of China's gas, has
been working for the past five years to put distribution
infrastructure in place.
    A 3,371 km (2,095 mile) trunkline linking the arrival point
in Heihe to Shanghai is being laid in phases and slated for
completion by 2024, state media reported.    
    PetroChina completed a 728 km (452 mile) section to
Changling in Jilin province in July, and slashed construction
time on a short leg that will ensure gas to parts of north China
this winter. A 1,100 km extension to Yongqing in Hebei province
is due by end-2020.  urn:newsml:reuters.com:*:nL4N28812L   
    PetroChina has also made its first foray into regional
midstream delivery - between national pipelines and city
networks - building part of a planned Heilongjiang grid
connecting a dozen key cities, Caixin reported in November.
    And the firm plans 5-6 bcm of underground storage, to be
built in depleted gas wells in Daqing, Liaohe and Jilin to cope
with the off-season demand trough, said Ding Guosheng, a gas
storage expert with the company.
         
    CLOSER TIES    
    The pipeline will cement China's spot as Russia's top export
market and give Russia a potentially enormous new market outside
Europe.
    Russian President Vladimir Putin has said trade between the
neighbours would reach a record $100 billion this year, up from
$87 billion in 2018. Moscow sees that figure rising to $200
billion by 2024 thanks in part to gas.
    "Russia is leveraging well on (China's) trade war ... In the
aftermath of western sanctions, Russia has turned to China and
won investment, markets and technology," said Professor Feng
Yujun, director of Russia and Central Asia Research at Fudan
University.     
    As Beijing battles air pollution, analysts at IHS market say
China's gas demand is poised to surge by half between 2018 and
2025, at which point Siberian gas is slated to supply a tenth of
China's total gas demand.
    If the northeast region is unable to absorb the full 38 bcm
gas by 2025, some fuel will be diverted to north China, where it
could likely compete on cost against imported LNG, said Jenny
Yang of IHS Markit. 
     
    RETAIL JOSTLING       
    Meanwhile, city gas distributors in Heilongjiang such as
China Gas Holdings  0384.HK  and Hongkong and China Gas Co. Ltd
 0003.HK  that provide "last-mile" connections to users are
eyeing a potential boon.  urn:newsml:reuters.com:*:nL3N2812ZV
    "China Gas has over the past 10 years spent more than 10
billion yuan ($1.4 billion) winning distribution licenses and
laying pipelines in northeast region," Frank Li, assistant to
president of China Gas Holdings, told Reuters. "Now it's time to
reap the fruits."
    In Heilongjiang's capital Harbin, the firm, together with
PetroChina's Kunlun Energy, is converting hundreds of heating
stations - centres that pipe hot water to nearby residents -
from coal to gas.
    Recent heavy snow pushed temperatures below freezing, but
workers are still racing to get ready for Russian gas.  
    "The pipelines are all settled and we are just waiting to
connect them into our boilers," said a worker at a Harbin
heating station.

    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Map of the Power of Siberia gas pipeline through China    https://tmsnrt.rs/2KUVhOr
Russia trade balance with China hits 13-year high as crude
shipments scale new record    https://tmsnrt.rs/2DiV6rU
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
 (Reporting by Muyu Xu in Harbin, China and Chen Aizhu in
Singapore; additional reporting by Jessica Jaganathan in
Singapore and Vladimir Soldatkin & Maria Grabar in Moscow;
editing by Richard Pullin)
 ((aizhu.chen@thomsonreuters.com; +65 6870 3284; Reuters
Messaging: aizhu.chen.reuters.com@reuters.net))