Article / 10 November 2014 at 11:00 GMT

Gazprom's curious contracts

Russia oil and gas expert
United Kingdom
  • China will not pay advance on Power of Siberia project
  • Gazprom has issued a $700 million Eurobond
  • Planned Altai pipeline facing financing, logistics woes

By Nadia Kazakova

Gazprom's contracts to sell pipeline gas to China keep on coming. One was signed in May, a memorandum for another penned on November 9 and there is a talk about a third one. The curious part is that they do not quite add up.  

The flagship East Siberia-China project (the "Power of Siberia") was pushed through at the eleventh hour in May of this year and was meant to come onstream in late 2018. In September, Gazprom's senior manager let it slip that the launch had been delayed until 2020. He was then promptly fired.

Yesterday, Gazprom CEO Alexey Miller officially acknowledged that China would not be paying a $25 billion advance for the contract. Gazprom was not prepared to lower the contract price any further to get the prepayment, according to Vedomosti. The Russian gas company might be looking for a commercial loan from China instead, but there are no ongoing negotiations regarding this matter. 

It is difficult to see why Chinese banks would be prepared to give billions in unsecured loans to Gazprom if they did not want to advance money on acceptable terms against future gas deliveries (a much less risky proposition). 

Pipeline

Gazprom's ambitious pipeline plans are encountering serious financing issues. Photo: iStock

It is also very curious that the Chinese side seems unwilling to fund the gas project, which should be as important for them as it is for the Russians. It is as if China does not quite believe that it will be successfully implemented without the involvement of independent gas producers such as Rosneft.

This all leaves Gazprom with a funding problem: unless the company finds the money, delays and higher costs — already a very real possibility — are inevitable. The company, unlike Rosneft, did not ask the government for any infrastructure financing from the National Wealth Fund. Even if it does ask for the money now, it is unlikely to receive much, given the long queue of eligible projects and limited available funds. 

The international capital markets do remain open for Gazprom, but only just. Gazprom has just issued a $700 million Eurobond. It will be paying 4.45% coupon on one year paper, compared to 3.6% annual interest on a seven-year, 750 million euro syndicated loan raised in February 2014. Unless capital markets reopen for Russian companies, this venue would remain too expensive and too short-term for such projects as Power of Siberia. 

As if it did not have too much of a headache about the East Siberia-China gas contract, Gazprom decided to make things more complicated by dusting off another China project. On November 9, Gazprom and CNPC signed a memorandum of understanding on the Altai pipeline. 

This piece of infrastructure should connect producing West Siberian gas fields with the existing East-West pipeline infrastructure in China. According to Vedomosti, Gazprom CEO Alexey Miller said that the pipeline should become operational by 2019 and would be a priority project for Gazprom.

The Altai project has been on and off the negotiating table for almost a decade. It is unlikely to go ahead now unless Gazprom offers a knock-down price for its gas to outcompete Central Asian producers supplying along the same route.

It all makes very little sense. Gazprom is currently selling its West Siberian gas to Europe at a good margin through existing and newly built (the Nord Stream) pipelines. And what gas would fill the South Stream pipeline, which is very much under construction?

Gazpromavnia

A Gazpromavnia Yak-42 waits on the tarmac at Novyy Urengoy. Gazprom's planned Altai pipeline is set to open by 2019, but its role in the company's strategy is unclear. photo: iStock

There must be a question mark over financing of the Altai pipeline. If China is hesitant to provide financing for its preferred Eastern route, what are the chances that it would give the money for the less desirable Western route represented by the Altai pipeline? Or for Gazprom's new brainchild, a third pipeline from far eastern Russia to China (which Gazprom wants to build instead of a more diversifiable liquid natural gas plant)?

With oil and gas prices falling, the ruble under strain and limited access to financing, Gazprom might need to have a critical look at its long list of giant construction projects, from the $50 billion South Stream to the $55 billion Power of Siberia and (now) the $14 billion Altai pipeline. 

-- Edited by Michael McKenna

Nadia Kazakova is a specialist on Russia, particularly the oil and gas sector. Read more of her views on social trading leader Saxo Bank's TradingFloor.com platform.
4y
LeTaulier_Lmi LeTaulier_Lmi
Again a white elephant commanded for political reasons! Economically and ecologically a non-sense.
4y
Mikhail Kalugin Mikhail Kalugin
"Кто-то сказал ..., его уволили.. согласно "Ведомостям" и т.д." аа вот и ссылка - [url=http://www.vedomosti.ru/companies/news/35731601/u-millera-i-sechina-odni-i-te-zhe-dengi]Ведомости - статья о слухах))[/url] )). Ахахах, Надя, гадание на кофейной гуще, на старую тему - "В России так все плохо, что скоро они все там загнутся" )) Все статьи пишИте под этим заголовком))Ахахах Не все такое белое и черное;) Я вот тоже частенько читаю о скором развале ЕС и падении бакса, как правило с некоторой долей критики - но у Вас все статьи по одной теме - спасибо посмеялся над Вашей целеустремленностью;) А что касается "лишних трубопроводов" - так не сложно догадаться, что из двух газовых партнеров ЕС-Россия, именно ЕС подвергает сомнению наращивание сотрудничества с надежным поставщиком газа в ЕС препятствуя строительству Южного Потока;) У Газпрома покупатель на западно-сибирский газ теперь есть еще один, а есть ли у ЕС такой же надежный поставщик дешевого газа как Газпром? Риторический вопрос;)

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