The Altay Pipeline: A Geopolitical Game Changer

Source: BP Statistical Review of World Energy 2018.


It is a matter of common knowledge that energy relations between Russia and China have boomed in the past decade, with all sorts of new infrastructure being built to facilitate the ever-further expansion of bilateral energy trade. Yet it has seemed for some time now that new gas projects are very unlikely to happen – the 38 BCm per year Power of Siberia pipeline will go onstream December 20, 2019 and seemed to satiate China‘s needs for Russian gas – but that has now changed. A second project, generally denoted as the Altay pipeline (sometimes also mentioned as Power of Siberia-2), which had been stalled for four years due to limited demand and Gazprom’s sanctions-induced constraints, is set to be the next big Russo-Chinese gas project.

The Altay pipeline is supposed to be 2 600km-long and transport Western-Siberian gas through the Tomsk, Novosibirsk and Altai Oblasts and the Republic of Altai, to enter China’s Xinjiang province thereafter. The framework agreement for the pipeline was signed in November 2014 between Gazprom and CNPC, stipulating a 30 BCm per year supply capacity and a 30-year duration (similar to Power of Siberia-1). The agreement implementation was left stranded almost immediately after its signing, pricing conditions were difficult to hammer out, the project needed significant infrastructure expenditures to which neither side was ready to commit and Chinese gas demand seemed to slow down in 2014-2017. Many of these factors could have been easily settled with some cooperation from the respective governments, but it has taken until now for an agreement to be reached due to several factors.

First, China had to decide that it needed the volumes of gas that the Altay pipeline would supply. The Xinjiang province, the point at which the pipeline enters China, is one of its main hydrocarbon-producing regions. Therefore, the gas would have to be transported further down the country, closer to the coastal regions. The West-East Pipeline, which also aggregates Central Asian volumes, could technically do this, but that would mean Beijing choosing Russian gas over the Turkmen gas. Turkmenistan’s heavy reliance on Chinese demand, with no more gas exports to Russia and Iran, means that Ashgabat will gladly pump as much gas to China as possible. For Altay to become more than just a pipe dream, China would need to construct a fifth line of the West-East Pipeline to accommodate additional volumes.

Second, negotiations over pricing terms have been going on for even longer than the decade-long talks over the Power of Siberia pipeline. In contrast to PoS, which is to be supplied from new fields in Eastern SIberia, the Altay pipeline would be fed from Gazprom’s traditional production hubs in the Nadym-Pur-Taz triangle and the Yamal peninsula. In simpler terms this means that Altay, from Gazprom’s point of view, ought to be on the same or a very similar pricing basis to its European gas supplies. This seemed an almost insurmountable obstacle and threatened to impede the project, but since both Gazprom and CNPC are state-owned entities, a political solution was possible. Judging by the words of PRC President Xi Jinping at the Vladivostok Eastern Economic Forum, top-down political pressure has driven the Altay pipeline agreement on this front.

If Beijing has learned anything from the U.S.-China political standoff of the past few months, it is that under current circumstances it would be irresponsible to depend too much on U.S. energy supplies. The White House makes little secret of its intent to use LNG as a geopolitical weapon against its foes. Even with all the difficulties that are on the horizon for the Altay pipeline, Beijing has plenty of geopoltiical reasons to see this project through. It has refrained from placing tarrifs on U.S. LNG but has decided to make the pivot towards Russian pipeline-supplied volumes instead. With Cheniere Energy being the only U.S. LNG exporter to have a long-term sales contract to China, Beijing made sure any additional ramp-up of U.S. LNG exports is to be kept at bay.

Full article: The Altay Pipeline: A Geopolitical Game Changer (OilPrice)

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