Timely Russian gas deliveries to China look far from certain

June 30, 2014

Shares of China Gas Holdings and its largest shareholder Beijing Enterprises Holdings have surged more than 10 per cent on the back of Russia's long-term natural gas supply deal with China that was signed last month, as they are seen as the biggest beneficiaries with substantial operations in China.

Investors' optimism is reasonable as the import deal effectively links the gas-hungry Chinese market to the world's largest gas exporter, Russia, securing long-term energy for Chinese distributors whose growth has been crimped by supply.

But the companies may have underestimated the risk of potential delays in gas delivery and the time it will take for output to ramp up. This could be a challenge for China Gas to hit its target to triple distribution volume with Russian gas in the next five financial years.

Macquarie Securities analysts said in a research report they expected Russian gas to start flowing to China in 2019 at the earliest and that a ramp-up to full capacity would take five years. This cautious view is in line with that of the Oxford Institute for Energy Studies, which is affiliated with Britain's University of Oxford.

"Russian [infrastructure] projects are typically over budget and late," the report said, which cited an even more conservative projection by industry consultancy Wood Mackenzie.

"Given the likely upstream development challenges and the fact that the gas would flow to nascent city gas markets, Wood Mackenzie expects 5 billion cubic metres (bcm) of gas supply via the 'Power of Russia' [pipeline] in 2020, and thereafter expects a gradual ramp-up to the contracted 38 bcm by 2025 - seven years later than what news headlines would suggest," Macquarie's report said.

Development of the Chayanda field, one of two supplying the pipeline, would be challenging because of lower density of the gas, which also adhered to underground rocks more tightly than gas in West Siberia fields, the report quoted Wood Mackenzie as saying.

Copyright, South China Morning Post, 2014.