Gazprom Barely Scraping a Profit From China Sales

Russia's pivot to Asia has not been as lucrative as hoped. The average export price for Power of Siberia pipeline gas in China, revealed by Gazprom for the first time last week, suggests the Russian gas giant has been barely making profit, analysts tell Energy Intelligence. CFO Famil Sadygov told a briefing last week that Gazprom generated 44.3 billion rubles ($616 million) in revenues in China last year, which puts the average price for the 4.1 billion cubic meter exports at around $150 per thousand cubic meters. That is slightly lower than the $164/Mcm estimated earlier by Energy Intelligence, based on Chinese customs statistics. The statistics data often slightly differ from Gazprom figures for export volumes as well. The Gazprom-reported price means China failed to become a premium market for Gazprom at a time when the company faces greater competition from LNG in Europe. It also proves that Russian pipeline gas is China’s cheapest source of supply, which raises doubts about the profitability of the massive $55 billion Power of Siberia pipeline project, as well as Moscow’s ability to wring more favorable terms from Beijing in negotiations over new gas contracts, including for the proposed 50 Bcm/yr Power of Siberia 2 pipeline (NC Jun.3'21). Gazprom signed the oil-linked 38 Bcm/yr Power of Siberia contract, reportedly with a 10% slope and several-month lag, in May 2014, just before oil prices dropped from above $100/bbl. Gazprom’s oil-linked price fell further to $119/Mcm in February-April this year, although in May it bounced back to some $146/Mcm, reflecting the recent recovery of oil prices, according to the customs data. China paid more to Central Asian rivals in May -- around $176/Mcm to Kazakhstan and Uzbekistan and $213/Mcm to Turkmenistan. In 2020, the average price was some $193/Mcm for Kazakh and Uzbek gas and $221.8/Mcm for Turkmen gas. The only other pipeline gas supplier, Myanmar, which sells gas in the Yunnan province close to its border but far from rival import pipelines and China’s LNG import terminals, charged China an average $359/Mcm in 2020 and $341/Mcm in May 2021. China’s average LNG import price was $230/Mcm in 2020, according to analysts. Turkmenistan remains China’s largest pipeline gas supplier with 11.8 Bcm exported in January-May this year, up 8.33% from a year ago (NC Jun.3'21). Gazprom exported 3.7 Bcm, up from 1.3 Bcm in January-May 2020, as Power of Siberia supplies gradually ramp up according to plan. In May, however, Russia’s exports dropped 45.5% month on month to 500 MMcm, while supplies from Turkmenistan increased 3.4%, from Kazakhstan -- 15.9% and Uzbekistan -- 68.6%, according to customs data. Gazprom’s Chinese price was only 12% higher than its average export price in Europe in 2020, while the marginal cost of supply to China is understood to be higher than in Europe, given the geologically complex resource base in East Siberia, the need to separate helium and other fractions from feedstock gas, and 2,200 kilometers of shipping costs via the Power of Siberia pipeline. Some analysts put the marginal cost at up to $110/Mcm, or $3.70 per million Btu. That includes a 30% export duty but excludes refining costs which will only grow with the recent launch of the Amur gas-processing plant where feedstock gas will undergo a more complex treatment (NC Jun.17'21). Vitaly Sokolov, Moscow