Historical Background
On March 21-22, 2006, within the official visit of the Russian Federation President Vladimir Putin to the People’s Republic of China (PRC), top executives of Gazprom and China National Petroleum Corporation signed the Protocol on Russian Natural Gas Deliveries to the PRC. The Protocol sets out the major accords on the gas supply terms, volumes and routes as well as the gas pricing formula principles. First shipments of Russian natural gas are anticipated to reach China in 2011.
On June 21, 2006, the town of Gorno-Altaisk hosted a meeting between the leaders of the Altai Republic and representatives of Gazprom and Tomsktransgaz, during which the parties discussed in-detail a plan of actions for the Altai gas pipeline construction.
On September 21, 2006, Alexey Miller, Chairman of the Gazprom Management Committee and Alexander Berdnikov, Governor of the Altai Republic inked at the Gazprom Headquarters the Agreement of Cooperation aimed at organizing joint work to expand the Unified Gas Supply System to eastern Russia and implementing large-scale gas projects, primarily the Altai gas pipeline construction project.
Importance and Prospects of Russian Gas Deliveries to China
The strategy of Gazprom as a global energy company can not be implemented without access to new promising markets. The demand for Russian gas has a considerable potential in Asia Pacific countries, with China in the first place.
The Protocol signing has outlined a whole range of strategic advantages for the Russian gas industry. The “Chinese vector” significance is tightly linked with Gazprom’s programs targeted at establishing new gas production centers on the Yamal Peninsula, in Eastern Siberia and the Far East. The presence of China among the major consumers of Russian gas gives a clear idea of prospective gas supply volumes, terms and routes.
At present, the share of natural gas in the PRC’s energy matrix is on a continuous rise, currently makes up 3 per cent and is expected to increase to 7 per cent by 2010. In 2004 domestic natural gas production reached 47.5 bcm in China and consumption was at roughly the identical level. At the same time, gas consumption rapidly grows and substantially outpaces extraction rates. According to the most conservative estimates, the PRC’s gas needs will amount to 97 bcm and 103-120 bcm by as early as 2008 and 2010, respectively. It is clear that gas import is vital for China.
Russian gas is the most optimal and mutually beneficial option to satisfy the PRC’s increasing energy needs and hence the parties are interested in shortly achieving the targets stated in the Protocol.
From a commercial view point, it is crucially important for Gazprom that gas will be supplied at prices formulated on the basis of petroleum prices. Certainly, there are some other benefits including a relative proximity of consumers (the transmission route to China is far lesser than to Europe) and the absence of transit countries along the supply route.
Gaining access to the Chinese market, Gazprom diversifies export directions, with gas supply commitments to China to have no impact on the execution of the contracts already in force with other countries acquiring Russian gas. Gazprom has sufficient gas resources and production capacities to meet these challenges.
Technical Features
Russian natural gas will be delivered to the PRC from the Unified Gas Supply System of Russia via the two routes: Western route, from the conventional gas extraction provinces in Russia and Eastern route, from the Sakhalin fields.
The annual gas supply volume is planned at 68 bcm, with the priority given to the Western route intended to supply 30 bcm of gas per annum. This route is prioritized due to the closeness of West Siberian fields to the existing gas infrastructure, which will enable to launch gas deliveries within a shorter period.
Phase 1 of the West Siberian gas supply project is planned to see a new Altai pipeline network created within the existing transmission corridor, with extensions to be laid through the mountains. 1,420mm pipes and state-of-the-art potent compressor stations will be used during the gas pipeline construction.
First gas will reach China via the Altai pipeline through the Western section of the Russian-Chinese border. The Altai pipeline will link West Siberian fields with the Xinjiang-Uyghur Autonomous Region in western China where it will integrate into the West-East pipeline extending to Shanghai. The gas main length is 2,800 km.
Environmental Aspect
Just like in case of Gazprom’s other projects, special attention during the Altai gas pipeline construction will be paid to ecological aspects. All potential pipeline routes will be considered at the itinerary planning stage. The final route selection will depend on both the project economics and possible environmental effects.
Gazprom has a long-lasting and unique experience in engineering and constructing gas transmission networks in an extreme environment, with the most advanced and reliable environmental protection, control and monitoring systems applied. The Blue Stream, Yamal-Europe, Northern Tyumen Oblast - Torzhok and other gas pipelines have proven to be a multi-year success. The Blue Stream pipeline construction was much more complicated than the Altai pipeline construction and required applying non-standard, unparalleled technologies, including in terms of environmental safety. The Blue Stream construction experience has practically proven the possibility of safely laying the pipeline through special nature reserves, rugged mountain terrain, etc.
The Altai project will undergo not only all statutory public hearings and ecological expertise (industry and state), but also independent environmental auditing. The project will be prepared and executed with maximum transparency in partnership with the scientific and ecological community and mass media.
Social Aspect
Executing the Altai project will enable to supply sufficient gas to the population centers along the gas pipeline route, create new jobs and significantly replenish the regional and local budgets through appropriate tax payments.
Finally, the planned gasification process will make it possible to improve the environmental situation in Gorno-Altaisk and its suburbs where, at present, especially during winter periods, more than 40 coal-fired boilers fill the sky with soot and fumes.
The Agreement of Cooperation between Gazprom and the Administration of the Altai Republic calls for Gazprom to get financially involved in social projects in the region.
Particularly, the Agreement contemplates supplying gas to rural areas, reconstructing roads, bridges and the Gorno-Altaisk airport runway. Gazprom will train specialists at higher education institutions for further gas pipeline maintenance. Moreover, the Company also sets out to finance other social projects.
Current Status
At present, the project sees a feasibility study on supply routes being performed, with the decision taken to shift over to the investment justification stage. The ongoing commercial talks are due to be finalized already in 2006.