Gas demand growth in China has long been looked at as a reason for optimism for growth in the LNG market both in the US and globally. The recently completed Power of Siberia pipeline between Russia and China has the potential to limit positive outlooks with China now able to further diversify their gas supply. With multiple Wave 2 facilities pushing towards FID, this week’s Energy Market Commentary will look at the potential impacts of the new Russia-China pipeline.
The aptly named Power of Siberia (China prefers the much less aggressive China-Russia east-route pipeline) is a massive 56-inch pipeline stretching over 1,800 miles from the Chayada gas field in Russia to the border city of Heihe in the Heilongjiang province of China. There it connects with the Chinese portion of the pipeline that currently runs through the northeast provinces of Heilongjiang and Jilin. That pipeline will be expanded to Beijing and Hebei in 2020 and then all the way to Shanghai in 2021. The Power of Siberia is initially slated to provide 0.48 Bcf/d of gas in 2020 and ramp up to the full capacity of 3.68 Bcf/d by 2025.
China’s gas consumption has gradually increased over the past decade, but electric generation in China is still dominated by coal. Since 2010, electric generation from gas has increased by over 187%, but still only accounts for 3.1% of total generation. This is due, in large part, to the dearth of natural gas capacity relative to coal. In 2017, China had just 75,000 MW of installed natural gas generation compared to over 981,000 MW of coal generation. This infrastructure limitation could limit how much gas can be absorbed from the Power of Siberia pipeline, especially in the more rural regions of northeast China. If this gas continues to work its way south along the coast, it could potentially displace future LNG demand.
One possible saving grace for LNG producers could be the ability for China to convert existing coal plants to gas. Through programs such as the Blue Sky Initiative, the Chinese government has committed to cleaning up the environment. CNPC, the state-owned oil and gas company, identified the Beijing/Hedei region as one of three key regions in China that are ripe for coal to gas switching with 6.9 Bcfe/d of installed coal capacity. In combination with the Heilongjiang and Jilin regions to the northeast, over 12.4 Bcfe/d of coal capacity is potentially available to be replaced by gas delivered via the Power of Siberia pipeline. If these regions can successfully convert existing coal plants to gas, it would absorb the additional Russian supply allowing US LNG to fill demand elsewhere in China.
In an interview with Reuters in October, a PetroChina executive acknowledged that while gas from Russia will be cheaper than that from Central Asia, it would still lead to a loss due to existing citygate prices being below the delivered cost of gas on the Power of Siberia pipeline. While contract details between Russia and China have not been released, multiple reports indicate that the gas prices are likely indexed to oil. Assuming the contract is similar to other Gazprom gas contracts at ~9% of Brent, $60 Brent would suggest China is purchasing gas for around $5.45/MMBtu. This is significantly higher than the price of coal and would seem to disincentivize coal to gas switching. However, economics are far from the only factor influencing China’s energy policy. Not only does the Power of Siberia project build positive relations with Russia, it also allows China to diversify its gas supply which is increasingly dependent on imports.
Once at full capacity, the Power of Siberia pipeline will provide a significant amount of gas into the Chinese gas market. However, with plenty of opportunity to switch from coal to gas in pursuit of cleaner emissions goals, the effect of the new pipeline on future US LNG exports to China may be limited. For more on BTU Analytics’ outlook on Wave 2 LNG, request a sample of our Henry Hub Outlook and our recently published Wave 2 LNG study.