Russia Under Pressure To Accelerate Energy Exports To The East

So significant was the launch of Russia’s Kovyktinskoye (Kovykta) gas field last week that reportedly ailing Russian President, Vladimir Putin, personally gave the order to start work on it and added at the launch ceremony: “A new Irkutsk gas production center has appeared on the Russian map; we are launching the unique Kovykta gas condensate field, the biggest in Eastern Siberia… Congratulations on this landmark achievement.” One of the reasons why the Kovykta field is so significant is its sheer size. As highlighted by Putin, Kovykta is the largest gas condensate field in Eastern Russia, with recoverable reserves conservatively estimated at 1.8 trillion cubic meters (tcm) of gas and 65.7 million tons of gas condensate. Discovered in 1987 but designated as a priority field just over three years ago, production drilling at the Kovykta field began in July 2019. According to the field operator, Russia’s state-run gas giant, Gazprom, the start-up and commissioning operations under load at one of the top-priority infrastructure facilities, the comprehensive gas treatment unit (CGTU-2), began in October 2022. Several more CGTUs will be added to bring the field to its design capacity to produce 27 billion cubic meters (bcm) of gas per year, said the company.

It is not just size that matters, but what you do with it that counts, of course, and what Russia will do with this huge quantity of new gas is to send it to China – hence Putin’s personal monitoring that the timetable for the Kovykta gas field project remains on track. Even before Europe surprised Putin by not doing what he expected after the invasion of Ukraine in February – he thought Europe would largely keep buying Russian gas and oil supplies, despite US pressure not to – the Russian President saw his country’s future in the East. Before COVID-19 ravaged China’s economic growth prospects and President Xi Jinping’s ‘zero-COVID’ policy made matters worse, the Asian Tiger economy was still growing at an annual rate of around 5 percent. It overtook the US as the largest annual gross crude oil importer in the world in 2017, having become the world’s largest net importer of total petroleum and other liquid fuels in 2013. Its dizzying pace of economic growth from the later 1990s to around five years ago was the principal fuel for the ‘commodities supercycle’ over that period. Additionally appealing to Putin was the mix of a capitalist strain in China’s economic practice with a Communist political ideology underlying it, begun by Deng Xiaoping in the 1980s and continued by Xi.

Related: Analysts Predict 1 Million Bpd Drop in Russian Crude Output

Consequently, it was always Putin’s intention to direct much of the gas that came from Russia’s northern and Arctic fields to China. This idea was reinforced practically by the US$400 billion or so 30-year deal signed in 2014 for Russia to export vast quantities of gas through the ‘Power of Siberia’ pipeline project to China over that period, managed on the Russian side by Gazprom and on the China side by China National Petroleum Corp. The agreement pledges the delivery of some 38 bcm of natural gas a year to China, totaling over 1 tcm of gas being supplied during the entire contractual period. This deal back in 2014 gave Russia a natural sales hedge for any reduction in gas flows going to Europe at any point after 2014. It also opened the way for massive Chinese investment in Russia’s power and transportation infrastructure and much broader and deeper co-operation between the two countries (including militarily) over the 30-year timescale.

With the gas supply route into Europe looking more complicated in the near-term at least, Putin is looking to increase Russia’s supplies to China. This will be done not just by channeling new supplies from new gas fields such as Kovykta to China through the Power of Siberia pipeline but also through new pipelines and via new routes, including for oil destined for China, principally in this latter regard the Northern Sea Route (NSR), as analyzed in depth in my latest book on the global oil markets. According to Russian news agencies, February saw Russia reach an agreement to sell an additional 10 bcm of gas to China from Russia’s Far East through a new pipeline to China’s northeast. Russia is also laying the groundwork for the construction of the ‘Power of Siberia 2’ pipeline, which will run through Mongolia from western Russia, with construction set to start in 2024. Again, this is a gas sales hedge for Russia, as it is intended to compensate for the loss of the revenues from the now-suspended Nord Stream 2 pipeline that was set to expand Russia’s gas flows into Europe. Putin’s intention, as mentioned several times in the past few weeks, is to boost its gas sales to China to 48 bcm annually by 2025 and to 88 bcm by 2030.

On the oil side of the equation, Russia’s efforts are being firmly bolstered by Gazprom Neft, the country’s third largest oil company by output and the oil arm of state gas giant Gazprom. July 2020 saw Gazprom Neft ship its first cargo of oil produced in the Arctic to China via the NSR. According to Gazprom Neft, it took 47 days to deliver a full cargo of 144,000 tonnes of sweet, light Novy Port oil – that comes from the Yamal peninsula developments – to the Chinese port of Yantai on the Bohai Sea from Russia’s north-western city of Murmansk. “Successful experience in the sale of Arctic oil in the European market and in-depth insight of Asia-Pacific markets allow Gazprom Neft to offer Novy Port oil with a unique year-round logistics scheme to Asian partners,” said Gazprom Neft’s deputy director general for logistics, processing and sales, Anatoly Cherner.

Putin’s favorite oil firm, Rosneft, is also currently actively pushing the development of the Vostok Oil project in Russia’s Far North that includes the Vankor cluster, Zapadno-Irkinsky block, the Payakhskaya group of fields and the East Taimyr cluster. Overall, it is estimated to hold proven liquid hydrocarbon reserves of at least 6 billion metric tons (about 51 billion barrels), all within the close proximity of the NSR that the company intends to exploit to deliver hydrocarbons to Asia. Recently, Rosneft chief executive officer Igor Sechin told Putin of the formal commencement of operations on the Vostok Oil project, stating: “The prospecting and exploration work are now underway, in accordance with our timetable,” adding that the design work for a 770- kilometer oil pipeline and a port had been completed.

In this context, Sechin also promised Putin that the scheme would create a “new oil and gas province” on Siberia’s Taymyr peninsula, with the complete project representing a total investment of RUB10,000 billion (USD135 billion), including two airports and 15 ” industrial towns”. Sechin concluded by saying that Rosneft’s Arctic developments would eventually produce 100 million tons of oil per year, with 30 million tons of oil being sent from the Arctic along the NSR between now and 2024 alone.

By Simon Watkins for Oilprice.com

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