Gazprom could scrap Vladivostok LNG for pipeline
Russia's incumbent gas producer Gazprom is considering delivering gas allocated from its planned Vladivostok LNG project through a pipeline to China instead, the company has said.
'Gazprom is ready to consider the possibility of pipeline gas export to China as an alternative to the Vladivostok LNG project,' said Alexey Miller, chairman of Gazprom's management committee, after a visit to China where he met with state-owned oil and gas company China National Petroleum Corporation.
The 10mtpa Vladivostok LNG project was expected to start production from the first 5mtpa train as early as 2018 with capacity growing to as much as 15mtpa by 2020.
Much of the LNG that was supposed to be produced by the project has already been marketed under various commercial agreements, most of which are non-binding to customers in Japan and China, including CNPC, a source familiar with the situation told ICIS.
However, Gazprom could instead choose to deliver the volumes allocated to Vladivostok LNG as pipeline supplies to CNPC and, potentially, other buyers in China, such as state-owned China National Offshore Oil Corporation.
While Gazprom is yet to officially scrap Vladivostok LNG, the move to pipeline could have been triggered by difficulties in raising finance for the project as well as procuring the advanced technologies necessary for its completion given current sanctions imposed against Russia.
Several Russian banks, including third-largest Gazprombank, are now restricted from borrowing in the US and Europe for longer than 30 days. Gazprombank had an option to purchase a 49% stake in the project and would be responsible for raising finance under the existing scheme.
Gazprom is facing an extremely difficult financial climate with a number of existing projects that are extremely capital intensive.
Delivering gas to China using the existing Sakhalin-Khabarovsk-Vladivostok pipeline after an extension to the Chinese border is likely to be considerably cheaper than committing to an LNG export project.
Gazprom is also facing plenty of global competition from other exporters, such as Australia, Mozambique and shale gas-driven projects in North America.
The economics of building an LNG export terminal in the context of global competitors working under the same timeline but with much better finance options are likely to add additional weight to the incumbent's decision.
However, it is unlikely that Gazprom would complete the pipeline extension to China's border before 2018, a source told ICIS. China, for its part, would have to complete the infrastructure on its side of the border to facilitate the import of gas.
Back in May, Gazprom signed a 30-year agreement with China to deliver up to 38 billion cubic metres (bcm/year) to CNPC.
Gazprom plans to construct the 3,000km Power of Siberia pipeline with a total capacity of 61bcm/year.
If the Vladivostok LNG project is replaced by pipeline deliveries, the volumes delivered would fall under the existing contract, a source told ICIS.
The gas will be primarily supplied from the Chayanda and Kovykta gas fields in Eastern Siberia starting in 2018. It is not clear if it would also involve the potential diversion of volumes from Sakhalin-2 and Sakhalin-3 upstream gas projects as well as Yakutia and Irkutsk production centres. Roman Kazmin
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