The Future of Russian Gas: Not In China but Europe?

Should Russian gas strategists be focusing on Europe or China for future growth? At first sight the answer looks obvious. There is no choice between fast growing China v. feeble debt ridden Europe. In addition, the Europeans are diverting rapidly away from gas, and Russian gas in particular. However on closer examination lower Chinese economic growth combined with a shift away from fossil fuels is likely to significantly reduce the size of the market for Russian gas. Meanwhile there are opportunities to grow the European gas market as the EU redesigns its climate change and supply security policies.

At first sight it looks like the Russian government made the right call in negotiating the Power of Siberia deal with Beijing. The costs are heavy. The costs of building this 3600 kilometre pipeline which would bring 38bcm of gas annually into China would be at least $20 billion. This is on top of a second Altai pipeline running from existing Siberian fields would bring 30bcm over 1420 kilometres into China at an additional estimated cost of $14 billion These heavy costs stem from the need to invest in new fields in Eastern Siberia and lengthy pipeline system required for both routes. Gazprom’s underlying assumption however is that there is a huge energy hungry Chinese market which can take Russia’s gas.

 

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