A New Russian Giant Pipeline Project

Russia, China and South Korea are to sign an agreement next October in Irkutsk which should pave the way for a feasibility study for Russia?s first gas pipeline to Asia. The new link will connect China and South Korea to the giant Kovykta gas field in Siberia. The agreement will be a milestone for the $10 to $14 billion project, lead by BP, as it has experienced problems for a few years due to opposition from the Russian pipeline monopoly, Gazprom.

Russia Petroleum, a venture in which BP holds 31 percent, China National Petroleum and Korea Gas have already agreed on the commercial terms of the 4?900 kilometer pipeline. For years, several routes have been discussed but the partners have decided that the pipeline should run from the gas field near Lake Baikal in eastern Siberia, skirting Mongolia, over Harbin in northeastern China and via the Yellow Sea to South Korea.

BP, Tyumen Oil Corp and Interros, a Russian metal and banking group are the owners of Russia Petroleum. The firm is the owner of the Kovykta gas field which is estimated to hold over 2 trillion cubic meters of gas reserves. The planned pipeline should transport 30 billion cubic meters of gas per year. 20 billion cubic meters will be supplied to China and the rest to South Korea. The link should become operational at the beginning of 2008.

The project should be accompanied with significant benefits for the involved countries. The economies of Russia and China will come closer together and cooperation in the energy sector will increase. The fast-growing Chinese market could be a stimulus for Russia, which wants to double its GDP until 2010. For China, the link means a further step in the direction of save energy supplies. Today, the country is very reliant on deliveries from the unstable Middle East countries.

The proposed pipeline will already be the second energy project which is agreed on between the countries this year. In May, Russia decided to supply China with 700 million tons of crude for $150 billion over the next 25 years. The oil will be delivered through a pipeline which runs parallel to the new proposed gas trunk.

For China, the gas pipeline is a further step to change the domestic energy mix. Cheaper gas is likely to boost local demand. This will be necessary to compete with cheap coal. Coal is still the major source of energy for China. Its share is more than 60 percent, while gas accounts for less than 3 percent. The Chinese government however wants to encourage the use of gas in order to reduce pollution which is caused by coal burning. To achieve this aim, China need cheap gas and offered Russia to pay $20-$25 per 1?000 cubic meters, which is the price for the same amount of coal in the region. Russia however offered to supply gas for $100 per 1?000 cubic meters, the same price it receives from export to Western Europe. The price difference makes clear that there will be hard negotiations until first deliveries can take place. For BP, the operator of the project, there is a change to put a foot into the Chinese market. The company could become involved in gas marketing in China, one of the fastest growing economies.

As beneficial the project might be for all involved countries, there is still a huge obstacle to overcome. The venture needs the support of the Russian government and Gazprom is heavily lobbying against the deal. Today, Gazprom possesses the monopoly to export gas from Russia. As long as the company is not involved in the project, its monopoly would be broken. Gazprom has once demanded a stake in the project but did not indicate how much it was ready to pay. It offered an alternative plan to sell the gas from the Kovykta field inside Russia. The company would prefer constructing a pipeline from more remote fields in Siberia to China. However, until today, the government is still supporting the BP pipeline. The project breaks the Gazprom monopoly might also be an incentive for the Russian government to start liberalizing the gas sector in Russia and to attract the necessary investment to develop gas fields in eastern Siberia and the arctic fields.


Author: Andreas Wild