29 May 2014, 10:00

New"Power of Siberia" pipeline to connect China with Gazprom's line

New"Power of Siberia" pipeline to connect China with Gazprom's line
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The Russia-China gas project includes the construction of a new "Power of Siberia" pipeline that is due to connect China's northeast with Gazprom's line in the Pacific coast city of Vladivostok. The estimated cost of the pipeline is $77 billion, which makes it the world's biggest construction project.

The two sides are expected to share the eye-watering cost of the new pipeline. Russia's Gazprom plans to invest $55 billion, though this figure alone exceeds the company's annual capex of around $40 billion.

Aleksei Kokin, a senior oil and gas analyst at Moscow-based UralSib Capital, says there are still some key open questions in this pipeline construction deal.

“The question here is how this capex is going to be financed, are there going to be some sort of low interest loans from China in some form and shape, and who is going to supervise the construction, whether there's going to be any oversight from China, as a result of their providing of financing,” Aleksei Kokin said.

The whole project is considered by Gazprom as the backbone of its Eastern Gas Program, which also includes investment into Sakhalin and Kamchatka upstream exploration and a gas liquefaction facility in Vladivostok. Most analysts stick to the view that the recently signed landmark contract is only the first in a row of those highlighting Russia-China cooperation in the gas field. Here is Julia Pribytkova, Vice President and Senior Analyst in the Corporate Finance Group at Moody's.

“It's difficult to start any large-scale project without some anchor contract, so this one provides a good step forward and hopefully from now on Gazprom will not only engage in exploration and production of the Yakutian Irkutsk region field and the construction of the pipeline, but also production of LNG at its contemplated Vladivostok plant, and potentially there will be some petrochemical production as well,” Julia Pribytkova said.

Last week's announcement from Shanghai was also followed by speculations that this joint project could see yet a second pipeline to be built in the Western Provinces of China, which could eventually expand Russia's annual Chinese gas sale to 61 bcm.

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