The Commercial and Political Logic for the Altai Pipeline
During President Putin’s visit to Beijing in November 2014 Gazprom and CNPC signed a memorandum of understanding concerning the export of gas to China via the so-called “western route” via the Russian republic of Altai. The announcement was hailed by Russia as another example of its shift towards Asia as a diversification of its traditional gas export business in the West.
This has important implications not only for Russia and China, but also for all the other potential suppliers of gas, and especially LNG, into North-East Asia. Confirmation that China could import up to 68bcma of Russian gas starting from 2019 would create a significant dent in the country’s potential LNG import requirement from 2020, increasing the competition between the planned sources of supply that are being constructed and planned over the next 5-10 years. Despite remaining doubts as to whether both Russia – China pipeline deals proceed to completion, it would appear that LNG suppliers are right to be concerned, as there is real commercial as well as political logic for significant Russian gas to flow south into the world’s fastest growing gas market.
From a Chinese perspective, growing gas demand, uncertainty over some of its existing sources of supply, a desire to create more competition with Central Asian gas and the one-off nature of the opportunity to negotiate with Russia from a position of exceptional bargaining strength mean that an Altai deal is also likely to make sense. There may be some concern over the need for more Russian gas, with the possibility that total supply of 68bcma (the combined capacity of the Power of Siberia and Altai pipelines) could account for as much as one third of total Chinese imports by 2030. However, any potential security of supply threat is offset by the fact that the Russian contribution to overall Chinese gas consumption would be much lower, at around 13%, while the share of gas in the China’s total energy balance is estimated to remain below 10% at that date.
Overall, then, the potential for a deal on exports via the Altai pipeline appears to have significant commercial and political logic. If a deal is signed, substantial problems will still remain, not the least of which will be Gazprom’s ability to raise the money needed to build the pipeline given its current inability to access western capital markets. Nevertheless, the impact of the signing of an Altai deal alone could have a significant impact on the ambitions of companies planning LNG projects that are also targeting the Chinese market, and as such the continuing discussions will require attentive observation over the next 12 months.
