There was a lot of excitement in the industry when Russian energy giant Gazprom announced a mammoth $US400 billion (£255.51 billion), 30-year export deal to China in May 2014 — but the agreement is now coming under extreme pressure on a number of fronts.
Morgan Stanley analysts on Monday morning suggested that construction of the necessary pipeline will be delayed by at least six months, taking the initial exports to mid-2019 at the earliest.
The initial deal had talked about beginning supplies as early as 2018.
Here’s part of the note from Morgan Stanley this morning:
According to a recent Interfax report, this contract was only activated on May 13 (2015) — seven months after the initial deadline. This means that exports from Russia can begin no earlier than in May 2019. The final deadline for the project coming on line is now May 2021. At the same time, in late July, China reportedly suspended a second pipeline, this one planned to pump 30 bcm per year from Western Siberian gas fields to China’s northern-western Xinjiang region.
It’s not the first problem that’s been noted for the Gazprom deal. Last week, a Financial Times report noted that the deal offers Gazprom, which is majority-owned by the Russian government, no protection against a prolonged period of lower oil prices. According to analysts that the FT spoke to, at current oil prices, the project is unprofitable or even loss-making for Gazprom.
In May 2014, Brent Crude was sitting at well over $US100 per barrel, but began to decline almost immediately after the agreement was reached.
Today, it’s down by nearly 56% on its May levels:
A report this weekend from AFP noted that this isn’t the first major challenge for Gazprom in recent years — it’s lost about five sixths of its market value since before the financial crisis.
What’s more, EU and US sanctions against Russia have made the company’s efforts to export to Asia more difficult. Here’s a snippet from AFP:
Western sanctions imposed on Moscow over the Ukraine crisis have undermined Gazprom’s attempts to turn away from Europe, its traditional market.
Washington’s ban on technology transfers to Russia for certain energy projects, including Gazprom’s Yuzhnoye Kirinskoye field in the far eastern Okhotsk Sea, is stifling Moscow’s ambitions on the Asian market.
The combination of delays, sanctions, and selling a product that’s plunged in value are all bad news for Gazprom — and by extension, for the Kremlin.