After a decade of negotiations, Russia’s Gazprom and Chinese CNPC have signed a major gas deal. However, the details of the deal remain unclear, raising suspicions about the project’s profitability for Russia.
The “contract of the century”, reportedly worth $400 billion, is being concluded at the time of the decelerating Russian economy and increased competition over Gazprom’s market share in Europe.
Over the next 30 years Russia will supply China up to 38 billion cubic meters (bcm) of gas annually, starting in 2018. The price formula for the gas isn’t clear, but is estimated to be $350 per 1,000 cubic meters, which is $30 lower than Gazprom charges Europe. It is hard to estimate what the real price will turn out to be and whether it is calculated at a discount from the Urals or Brent oil price.
Moscow-based experts warn that the capital expenditure for the project may be much higher than the announced $70 billion, making it unprofitable. First, the $55 billion that Russia is supposed to allocate for construction, is likely to double or even triple, given the track record for Sochi and other large Russian projects.
Second, the 4,000 km pipeline, which will have to be built over the terrain of the East Siberian mountains, does not even exit, and could require up to 20 compressor stations, consuming expensive gas.
Third, the project will require massive and expensive gas storage facilities, which may not be feasible in the pipeline’s terrain. Finally, there is no construction labor available in the region, and it will be flown from Europe and Central Asia at a premium. Even the gas fields themselves are not developed.
Thus, with the high capital expenditure allocation before the Chinese even start to pay price unknown for gas, and U.S. dollar inflation devaluing the future payback, the “project of the century” may turn into a white Siberian woolly mammoth.
Ariel Cohen (@Dr_Ariel_Cohen) serves as a senior research fellow in Russian and Eurasian studies and international energy policy at the Heritage Foundation.