China Pays Significantly More for Gazprom's Gas

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The price of Gazprom’s gas sales to China increased by more than 40% on the year in the first half of 2023, a reflection of the tremendous spike in oil prices in mid-2022, Energy Intelligence has estimated based on the Chinese customs data.

The Russian state-run pipeline gas exporter generated some $3.4 billion from supplies via the Power of Siberia pipeline to China in the first half of 2023, according to data from China’s General Administration of Customs released last week.

The customs agency doesn’t disclose volumes imported by pipeline, but assuming Power of Siberia exports slightly exceeded contracted volumes — agreed at 22 billion cubic meters for full year 2023 — the average price might have been close to $300 per thousand cubic meters in the first half of this year, up from around $210/Mcm a year ago, Energy Intelligence calculates.

The price is indicative of what Gazprom probably counted on when signing the oil-linked Power of Siberia gas supply deal with China National Petroleum Corp. back in 2014 when oil prices were above $100/bbl.

The 38 Bcm/yr contract is priced off oil, allegedly with a 10% slope and nine-month lag — i.e., meaning the current price reflects last year’s oil price spike to above $100/bbl. This should recede given this year’s sharp decrease in prices to around $70/bbl.

Regardless, the price looks healthy compared with previous years of the Power of Siberia's operations, which started in December 2019. It is also higher than Gazprom’s average export price in Europe in 2015-20 and potentially generating similar margins. This is good news for Gazprom, which is desperately seeking new profit centers after the loss of most of the European market.

Marginal Cost

The marginal cost of Gazprom’s supplies to Europe can be estimated at around $120/Mcm, including the 30% export duty, while that of Power of Siberia might be $170/Mcm due to costlier upstream in East Siberia, a Russian gas analyst told Energy Intelligence. And that doesn’t include the cost of refining gas at the Amur processing plant, which would drive the marginal cost of Power of Siberia supplies even higher, he added.

How sustainable margins are is an open question, as it depends on how long oil remains at current levels. Also, negotiating a more lucrative price with China will be very challenging considering the latter will try to take advantage of demand uncertainty globally and Moscow’s divorce with the West.

Chinese customs data do not give a clear picture of the current price for rival pipeline gas imported from Central Asia, but when both import volumes and values were disclosed before 2022, Gazprom’s Power of Siberia gas was the cheapest in 2020-21.

Europe’s Spot Gyrations

Gazprom used to rely on oil indexation in Europe, which in the beginning of the 2010s resulted in ultra-high margins of around $400/Mcm. The average price then fell in 2015-20 as Gazprom, under pressure from EU buyers and regulators, gradually increased the share of hub indexation in long-term contracts to more than 80% as of 2021.

Later, when spot prices reached record lows during the Covid-19 pandemic in 2020 and Gazprom opted for a volume-over-value tactic, or selling cheap on spot via its Electronic Sales Platform, the company's average export price in Europe fell below the one in China — $134/Mcm versus $155/Mcm. But unlike in Europe, Gazprom was hardly generating any profit at that price.

Hub indexation pushed Gazprom’s export prices in Europe to new levels during in 2021, and even higher in the wake of Russia’s invasion of Ukraine. This year European spot prices are down from 2022 peaks on full inventories and availability of alternative sources. Energy Intelligence’s border price estimates show that Gazprom’s average price in Europe fell to some $530/Mcm in the first half of 2023, down from above $1,000/Mcm for the full year 2022.

Although margins in Europe are now considerably higher than in China, Gazprom revenue is nowhere near wartime peaks of the first half of 2022. Export volumes in Europe have dropped by around 80% to just around 2 Bcm per month, which coupled with a decline in prices resulted in Gazprom’s revenue in Europe, excluding Turkey, falling to some $730 million in June. This is lower than in any pandemic month.

LNG Shipments to China

China increased imports of LNG from Russia by 66% on the year to some 3.9 million tons in the first half of 2023, Energy Intelligence calculates based on Chinese customs data. The growth rate exceeded that of China’s overall LNG imports (7.2%) and total gas imports (5.8%) thanks to higher demand and the lifting of “zero-Covid” restrictions.

Supplies increased mainly from the Gazprom-controlled Sakhalin-2 plant in Russia’s Far East, which boosted exports to China by 65% on the year to some 1.4 million metric tons, according to Kpler data. The plant sells only spot cargoes in China, which look more attractive as spot prices decline this year.

Russia’s average LNG export price in China was some $525/Mcm in the first half of 2023, down from $700/Mcm in the same period of last year, Energy Intelligence calculates.

Gas Prices, Gas Supply, Ukraine Crisis
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