London — Russia launched gas deliveries to China via the Power of Siberia pipeline Monday, which is set to ship 5 Bcm in2020, and gradually ramp up supplies to 38 Bcm in 2025.
"We are starting deliveries of Russian pipeline gas to China. This step takes Russian-Chinese strategic energy cooperation to a new level," Russian President Vladimir Putin said during a launch ceremony broadcast on Russia 24 television.
The project is one of the most anticipated energy projects in Asia, with significant implications for China's natural gas supply, LNG import demand in the region and Moscow's energy strategy in Asia.
The northern section of the pipeline is 1,067 km (662 miles) long and connects the Power of Siberia section in Russia with customers in northeastern China and Beijing-Tianjin-Hebei regions, helping improve supply optionality and energy security in the country's biggest winter demand center.
"The Russia-China pipeline is expected to supply 7 million cu m of gas during the trial run period in December, then the monthly supply will be increased to 10 million cu m starting from January, and we expect the total gas supply to reach 5 Bcm in 2020," PetroChina said on its official website.
Under the agreement, Russia will supply 5 Bcm of gas in 2020, 10 Bcm in 2021, 15 Bcm in 2022, gradually increasing the annual volume year on year to 38 Bcm in 2025.
The 5 Bcm/year of gas supply is estimated to account for around 1.6% of China's total gas supply estimates of 316 Bcm in 2019, according to S&P Global Platts Analytics and China's National Development and Reform Commission.
Once it reaches full capacity of 38 Bcm/year in 2022-23, it would account for around 9.5% of China's total gas supply estimates of 402 Bcm for 2022.
"By 2023, nearly 40% of Chinese gas demand growth will be met through Russian gas from Power of Siberia. With global LNG markets banking on Chinese demand growth to sustain new projects, Russia's pipeline and LNG pincer move on Asia does give reason for pause," said S&P Global Platts Analytics senior LNG analyst Samer Mosis.
This will make Russia one of the major natural gas suppliers to China in the future, besides Australia and Turkmenistan.
Australia and Turkmenistan are currently the top two natural gas suppliers to China, sending 22.8 million mt or31.4 Bcm, and 20.2 million mt or 27.8 Bcm in the first 10 months of this year, Platts' calculation based on data from the Chinese customs showed.
The full Russia-China gas pipeline is expected to be completed by 2022-23 and will have a length of 3,371 km in China, which will be divided into three sections -- north, central and south. It will terminate in Shanghai, passing through nine provinces and autonomous regions, connecting with the Northeast pipeline network, Shaanxi-Beijing pipeline network and West-East pipeline network.
PetroChina's parent company China National Petroleum Corp signed a 30-year sales and purchase agreement with Russia's Gazprom in 2014 to purchase gas from the Power of Siberia pipeline.
The project will further enhance China's supply security, and follows Beijing's decision to merge gas pipelines of the three national oil companies to boost connectivity and ease infrastructure constraints.
Chinese President Xi Jinping said during the ceremony "This is a good result of our bilateral cooperation. The launch of the pipeline is one of the important interim results and the start of a new era in our bilateral ties."
EXPORT DIVERSITY
For Russia the pipeline represents a major step in increasing export diversity and reducing dependence on Europe as its primary market.
"We project that deliveries through the PoS pipeline will make up 14% of Gazprom 's total natural gas exports by 2025," analysts at VTB Capital said.
Platts Analytics said: "It is interesting to note that the gas flowing through Power of Siberia is indexed to oil prices and therefore the profitability of the project is dictated by oil markets rather than European gas hub prices, something very much outside of Gazprom's sphere of influence."
Platts Analytics added that because Power of Siberia is physically and operationally independent of Gazprom's core European export destinations it in many ways represents a hedge against risks in these markets, particularly the threat from burgeoning European LNG inflows and the currently historically low European gas hub prices.
The Power of Siberia will transport natural gas from the Irkutsk and Yatkutia producing regions for delivery to Russian customers in the Far East and China via the eastern route.
"This project is also important for Russia because pipeline gas will not only be exported, but also delivered to the Amur gas processing plant, which will be one of the largest in the world," Putin added.
In September, Putin also asked Gazprom to consider the western route to export Russian gas to China via Mongolia.
-- Anastasia Dmitrieva, anastasia.dmitrieva@spglobal.com
-- Rosemary Griffin, rosemary.griffin@spglobal.com
-- Analyst Cindy Liang, cindy.liang@spglobal.com
-- Edited by Jonathan Dart, jonathan.dart@spglobal.com