Article / 09 September 2015 at 10:30 GMT

Gazprom must decide about China

Russia oil and gas expert
United Kingdom

  • Plans to double a gas line to Germany and build one line to Turkey look sensible
  • Planned 55 bcm Nord Stream 2 to Germany could be completed by end-2019
  • Turkish plan calls for single line instead of massive four-string pipeline
  • Gazprom revisiting East Siberia-China gas contract
  • New Nord Stream and Turkish Stream capacity would affect Ukraine transit
  • Capacity expansions could halt Altai pipeline project (West Siberia–West China)
  • Investors could hope for higher dividend if Altai talks drag on
Gazprom gas plant
 Russia's Gazprom plans to double the capacity of a gas pipeline under the
Baltic Sea to Germany and build a single line to Turkey. Photo: Gazprom.com

By Nadia Kazakova

Russian gas giant Gazprom has made some sensible decisions about pipeline plans in the last couple of weeks, though it still faces tough questions about a deal to sell Siberian gas to China and plans for a pipeline from Siberia to China.

Gazprom has moved ahead with the plan to double the Nord Stream pipeline capacity under the Baltic Sea to Germany by setting up a consortium. The company also said the Turkish Stream pipeline might start off as a single line, just to supply gas to Turkey.

That seems a better idea than building a massive four-string, 65 billion cubic metres pipeline through Turkey to the border with Europe, as Europe does not want to extend such a line.

Another good decision is to revisit the pricing of the West Siberia-China gas contract.

Gazprom seems now to be more determined to make the project viable than to get it signed at any cost. The price issue could, of course, be just an excuse for why the contract is unlikely to be signed until spring next year at the earliest.

All these sensible decisions, however, are made with an elephant squarely in the middle of the room: the agreement to sell East Siberian gas to China. Gazprom management's mantra that the contract remains profitable at current oil and gas prices does not sound convincing.

Gazprom seems to be hoping that a recovery in oil prices will float this boat eventually. Investors might be less optimistic.

They might be simply discounting the declared cost of the Power of Siberia pipeline ($55 billion) from the company's market capitalization ($49.7 billion). That could explain why Gazprom  trades on an otherwise ludicrous price/earnings ratio (2015) of 2.3x and PER (2016) of 2,2x.

Unless Gazprom explains how it is going to make money on the Chinese gas contract, this “China discount” is likely to persist.

The revival of the Nord Stream expansion plan is moving ahead full blast.

On September 4, Gazprom and foreign companies set up a joint venture for the Nord Stream 2 extension. Gazprom will hold a 51% stake in New European Pipeline, while E.ON, Royal Dutch Shell, OMV and BASF/Wintershall will get 10% each and Engie 9%.

The plan is to double the capacity of the Nord Stream pipeline from the current (nameplate) 55 bcm to 110 bcm. The cost is estimated at €9.9 billion ($11 billion), and the extension is to be operational by end-2019.

Gazprom's Deputy CEO Alexander Medvedev has said the company has all the necessary permits to go ahead with the construction of the additional two lines of the Nord Stream pipeline. If the project indeed requires no more regulatory approvals, Nord Stream 2 might be completed by end-2019, as flagged.

Gazprom-Nord Stream

 












Big plans, big money. The Nord Stream 2 project would double capacity 
of the Baltic Sea line to 110 bcm for about €10 billion. Photo: Gazprom.com


If, as Gazprom insists, the Nord Stream expansion brings new volumes of Russian gas to Europe (rather than merely replacing the Ukrainian transit), it will probably put an end to the Altai gas project (Western Siberia – Western China gas pipeline), as Gazprom might struggle to fill both pipelines with West Siberian gas as well as meet Russia's gas demand as the economy recovers.

The construction of Nord Stream 2 (55 bcm) and the first line of the Turkish Stream pipeline (15.75 bcm) will undoubtedly affect Ukrainian transit volumes. In 2015, Russia is expected to transit 51 bcm of gas through Ukraine (vs 79.5 bcm in 2013 and 62.2 bcm in 2014).

When the new pipelines are on stream, the Ukrainian transit volumes might drop below 10 bcm a year. That would save Gazprom some $1-2 billion in transit fees annually (assuming a fee of $3-5 per 1,000 cubic metres per 100 kilometres, 40 bcm of export volumes and 1,160 km transit distance via Ukraine). 

The combined cost of Nord Stream 2 and Turkish Stream (line 1) is currently estimated at around EUR 14.2 billion (EUR 9.9bn for Nord Stream 2 and EUR 4.3bn for Turkish Stream 1) or $15.76bn. Gazprom would get an extra 70.75 bcm of the new export capacity for its money.

On the other hand, Gazprom has put a $14 billion as the cost of the 30 bcm Altai pipeline (in 2010) and on more recent estimates, it could be around $18.5bn.

Investors might hope that the price negotiations on the Altai pipeline take a bit of time, while Gazprom is building two pipelines for the price of one, and keeping the difference for paying dividends.
f



Magnificent St Sofia in the northeast Chinese city of Harbin is a shining example of Russian/ Chinese collaboration but Gazprom needs to decide if the Altai pipeline is value. Photo: iStock


— Edited by John Acher

Nadia Kazakova is a Russian oil and gas specialist.

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Tradingfloor.com permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Tradingfloor.com and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Tradingfloor.com is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Tradingfloor.com or as a result of the use of the Tradingfloor.com. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. When trading through Tradingfloor.com your contracting Saxo Bank Group entity will be the counterparty to any trading entered into by you. Tradingfloor.com does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of ourtrading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws. Please read our disclaimers:
- Notification on Non-Independent Invetment Research
- Full disclaimer

Check your inbox for a mail from us to fully activate your profile. No mail? Have us re-send your verification mail