Russia may seek Kazakh alliance to boost position in China gas negotiations

LONDON (ICIS)–Russia may need to increase its reliance on Kazakhstan to consolidate its position in the Chinese market and strengthen its gas price negotiation position with buyers in China, a former UK government advisor on Central Asia said.

Speaking to ICIS, Angus Miller, chairman of UK-based advisory TelosNRG, said Russia and Kazakhstan may consider a combined approach to gas sales to China.

Russia concluded a 38billion cubic metre/year agreement with China’s CNPC and started supplying gas from 2019 via the 3000km Power of Siberia pipeline.

However, the sale price may have been $9.00/MMBTu in 2021, at a time when European hub prices soared well-above that to record levels.

Meanwhile, in 2018, Kazakhstan’s KazTransGaz (KTG) signed a five-year export deal to supply 10bcm/year to China, but it represents a third of the country’s annual output and has at times stretched its ability to respond in full to China’s peak demand.

Miller said China had had a real say on export prices in recent years but a joint Kazakh-Russian strategy could boost chances of negotiating more attractive contractual terms for producers.

He said that in his view, the recent events in Kazakhstan were likely to usher in a comeback of Russian interests, noting that many institutions and companies, including in the energy sector, could witness a clearout of the old guard and the return of an elite closer to the Kremlin.

CHANGE OF GUARD

This may prompt China to seek alternative supplies from the Middle East. In fact, as events were unfolding in Kazakhstan, China met representatives of some Gulf states with a view to expedite and implement a free trade agreement that would help to negotiate attractive terms for oil and gas deals.

“Central Asian countries had the opportunity and plans for reform in the 2000s but some had let these die on the vine, resulting in the kind of reaction seen recently in Kazakhstan,” said Miller.

Miller said Central Asian gas producers had focused on selling volumes to China rather than European markets over the last decade because of EU policies favouring a renewable energy.

This meant they had no incentives to invest in upgrading and maintaining the export infrastructure such as the Central Asia-Centre lines, which have historically connected the regional networks to the Russian transmission system.

Even so, it is possible that in 2021, some Central Asian gas may have helped Russia to meet soaring demand at home, in Europe and in Turkey.

GOING WEST OR EAST?

According to ICIS calculations, Kazakhstan supplied 8.03bcm to Russia in the first ten months of 2021, a small decline on the 8.70bcm supplied over the same period the previous year and 1bcm/year lower than in 2019.

Turkmenistan signed a five-year contract for 5.5bcm/year supplies to Russia via the Central Asia-Centre pipeline which transits Kazakhstan and merges in southern Russia with the Soyuz pipeline heading west to Ukraine.

International press reports quoting the Russian ambassador to Turkmenistan suggested in December that Russia imported double the contracted volumes for the full year 2021.

Speaking to ICIS, Vitaliy Yermakov from the Oxford Institute for Energy Studies, said he was sceptical about the figures. He said Russia had swap agreements in place with Central Asian countries but imports had been declining in recent years, noting that regional countries were torn between Russia and China.

THE TURKISH FACTOR

Nevertheless, Gazprom may have relied on Central Asian gas to meet demand, particularly in Turkey, where consumption rose 46% year on year in the first ten months of 2021, according to latest figures by the regulator EPDK.

Yermakov explained that since prices plummeted in 2020, Gazprom relied on storage withdrawals rather than increase domestic output to supply the domestic and European markets.

If that is the case, this means that based on the 2020 experience, Gazprom may have been preparing to rely on its 23 domestic storage facilities located mostly in the southern regions to supply not only its domestic market but also European and Turkish consumers in 2021.

However, when Turkey’s gas demand soared and domestic consumption from its own clients rose 14%, Gazprom may have been scrambling to secure extra volumes, not least because surplus production at some of the legacy fields in western Siberia has been declining.

The premature decline may have been caused by the introduction in 2014 of a formula-based mineral resource extraction tax (MRET). The levy, Yermakov argued in a number of earlier articles, incentivised Gazprom to ramp up production at the higher cost newer fields such as Bovanenkovo in the Yamal peninsula and hold back output at the legacy fields in the Nadym-Pur-Taz area which supply Europe via Ukraine.