Is This The Next Coal Megaproject?

Some 80km from the Chinese border, the tiny Russian village of Yerkovtsy might provide the setting for a new Russo-Chinese megaproject. The 38 BCm/year Power of Siberia (and its potential follow-ups, currently under discussion) was the gas manifestation of the Moscow-Beijing energy axis, with Yamal LNG extending it to the sphere of liquefied gas, the 80 mtpa ESPO pipeline and Rosneft's 25-year $270 billion supply contract were the facets of oil cooperation, and it seems that coal will finally have a similarly massive project. The $10 billion coal-fuelled 4 GW Yerkovetskaya power plant, a joint project of Inter RAO and the State Grid Corporation of China, is back on the agenda, with high-profile state-owned financial institutions ready to back the project. Yet will it be enough?

The concept for the Yerkovetskaya power plant came up around 2010, when China's electricity consumption was growing by some 300-400 TWh per year, and the project for a joint venture built on Russian territory, yet primarily aimed at satisfying Chinese energy needs seemed to be a perfect fit. Even then smog and overall pollution was a pressing issue for Chinese lawmakers, doubly so now when air pollution directly causes the death of more than 1 million people and the fine particle concentration in air is above any reasonable standard, despite the government's robust drive to reduce pollution as soon as possible. Li Keqiang's government even went as far as to ban the construction of new coal-fired power plants in the country's most polluted areas, most notably around Beijing.

The Chinese authorities have also shut down dozens of coal mines, most notably in the coal-rich province of Shanxi which leads the country in coal output. Shanxi has been suffering from widespread water pollution problems, too, following decades of groundwater contamination. From this perspective, it is understandable why the Chinese would want to outsource any sort of pollution, yet keep the electricity produced, as it fully fits the government's purification policy. Moreover, in contrast to already existing power transmission lines from Russia to China which are laid to the energy-superfluous Heilongjian province, the transmission lines from the Yerkovetskaya plant would go all the way down to Beijing, some 1500 km southwards. A sufficient distance to keep all burning-related contaminants far away from the Chinese capital. Related: Norway Oil Strike Ends Just As Another Is Set to Begin

If built, the Yerkovetskaya power plant will become Russia's second-largest, only the monstrous 5.6 GW Surgut (which runs on the region's plentiful associated petroleum gas) is bigger. As for solid fuel thermal power plant, the Yerkovetskaya plant would become Russia's leading one, overtaking the 3.8 GW Reftinskaya power plant. With an annual electricity generation of 20-30 TWh, the thermal power plant in and of itself would create more energy than some countries (Iceland, Slovenia or Croatia) in total. Interestingly enough, the current 4GW capacity Yerkovetskaya plant was downgraded from a previous 8 GW production capacity which would have made it the world's largest generating entity, however, due to falling electricity demand in 2014-2015, plans for such a gigantic plant were scrapped.

Despite renewed Chinese interest in the project (Russian interest never really faded), several issues still remain unsettled. The Russian electricity giant Inter RAO, holding exclusive rights to the import and export of electricity to and from Russia, would want to conclude a long-term, preferably 25-year, contract similarly to those clinched in the oil and gas spheres. For this, the price formula needs to be agreed upon, an issue which led to several delays in project's implementation in 2015-2016. Chinese negotiators are notoriously unyielding negotiators - negotiating the price formula for the Power of Siberia gas pipeline took almost a decade - so this might take several months, if not years, to conclude.

Yet with the Russo-Chinese strategic energy partnership edging ever closer, the project could make use of a substantial political buttress. In contrast to previous negotiations with regard to its construction, this time leading state-owned banks expressed their interest in financing the construction of the Yerkovetskaya power plant ($8 billion on the power plant, more than $2 billion on the power transmission lines and coal extraction). According to Russian sources, the then-head of Russia's main federal development bank Vneshekonombank (VEB) S. Gorkov suggested to B. Kovalchuk, CEO of Inter RAO, that VEB sign on the dotted line. Its Chinese counterpart would be the China Development Bank, with which VEB already has a hefty portfolio of joint projects.

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From a Russian point of view, it is very troubling that there has been almost no discussion of the environmental consequences the construction of such a power plant entails. The reason for this is quite simple - unlike recent landfill gas blowouts in Volokolamsk and other satellite cities of Moscow, the Amur Oblast of Russia is one of the least densely populated in the country (2.21 people/km2) and even within the Far Eastern Federal District it remains one the most economically depressive. Evidently, economic growth at whatever cost has been given priority over the population's strivings, especially so that coal extraction will happen right next to the power plant. For the needs of the power plant, the shareholders plan to source the required amounts of coal from the adjacent Yerkovetsky coal mine (3P reserves amounting to 1.08 billion tons of coal with a current level of extraction barely reaching 3.5 million tons).

Graph 1. Coal Production in Russia in 2000-2017.

Source: Russian Ministry of Energy.

It was expected that the coal mine's production would be increased tenfold to 35 million tons per year to satisfy the power plant's needs. Similarly to the issues of establishing a mutually acceptable pricing formula and determining the capital structure of the proposed joint venture, connecting the manifold dots would require some time before the project is a robust and coherent one. Russia, always eager to find new coal export outlet against the background of a tightening domestic market which uses increasingly less of it in its power generation, sees the project as another way of bringing money and jobs to the Far East, whilst China would benefit greatly from the relatively low production costs and the outsourcing of all environmental risks. From now on it will all depend of the two sides' dealmaking skills to see the project through.

By Viktor Katona for Oilprice.com

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