• 3 minutes e-car sales collapse
  • 6 minutes America Is Exceptional in Its Political Divide
  • 11 minutes Perovskites, a ‘dirt cheap’ alternative to silicon, just got a lot more efficient
  • 6 days The United States produced more crude oil than any nation, at any time.
  • 7 days How Far Have We Really Gotten With Alternative Energy
  • 10 days Oil Stocks, Market Direction, Bitcoin, Minerals, Gold, Silver - Technical Trading <--- Chris Vermeulen & Gareth Soloway weigh in
  • 9 days James Corbett Interviews Irina Slav of OILPRICE.COM - "Burn, Hollywood, Burn!" - The Corbett Report
  • 10 days The European Union is exceptional in its political divide. Examples are apparent in Hungary, Slovakia, Sweden, Netherlands, Belarus, Ireland, etc.
Viktor Katona

Viktor Katona

Viktor Katona is an Group Physical Trader at MOL Group and Expert at the Russian International Affairs Council, currently based in Budapest. Disclaimer: views set…

More Info

Premium Content

The Altay Pipeline: A Geopolitical Game Changer


It is a matter of common knowledge that energy relations between Russia and China have boomed in the past decade, with all sorts of new infrastructure being built to facilitate the ever-further expansion of bilateral energy trade. Yet it has seemed for some time now that new gas projects are very unlikely to happen – the 38 BCm per year Power of Siberia pipeline will go onstream December 20, 2019 and seemed to satiate China‘s needs for Russian gas – but that has now changed. A second project, generally denoted as the Altay pipeline (sometimes also mentioned as Power of Siberia-2), which had been stalled for four years due to limited demand and Gazprom’s sanctions-induced constraints, is set to be the next big Russo-Chinese gas project.

The Altay pipeline is supposed to be 2 600km-long and transport Western-Siberian gas through the Tomsk, Novosibirsk and Altai Oblasts and the Republic of Altai, to enter China’s Xinjiang province thereafter. The framework agreement for the pipeline was signed in November 2014 between Gazprom and CNPC, stipulating a 30 BCm per year supply capacity and a 30-year duration (similar to Power of Siberia-1). The agreement implementation was left stranded almost immediately after its signing, pricing conditions were difficult to hammer out, the project needed significant infrastructure expenditures to which neither side was ready to commit and Chinese gas demand seemed to slow down in 2014-2017. Many of these factors could have been easily settled with some cooperation from the respective governments, but it has taken until now for an agreement to be reached due to several factors.

First, China had to decide that it needed the volumes of gas that the Altay pipeline would supply. The Xinjiang province, the point at which the pipeline enters China, is one of its main hydrocarbon-producing regions. Therefore, the gas would have to be transported further down the country, closer to the coastal regions. The West-East Pipeline, which also aggregates Central Asian volumes, could technically do this, but that would mean Beijing choosing Russian gas over the Turkmen gas. Turkmenistan’s heavy reliance on Chinese demand, with no more gas exports to Russia and Iran, means that Ashgabat will gladly pump as much gas to China as possible. For Altay to become more than just a pipe dream, China would need to construct a fifth line of the West-East Pipeline to accommodate additional volumes. Related: The Millennials Making Millions In Texas Oil

Second, negotiations over pricing terms have been going on for even longer than the decade-long talks over the Power of Siberia pipeline. In contrast to PoS, which is to be supplied from new fields in Eastern SIberia, the Altay pipeline would be fed from Gazprom’s traditional production hubs in the Nadym-Pur-Taz triangle and the Yamal peninsula. In simpler terms this means that Altay, from Gazprom’s point of view, ought to be on the same or a very similar pricing basis to its European gas supplies. This seemed an almost insurmountable obstacle and threatened to impede the project, but since both Gazprom and CNPC are state-owned entities, a political solution was possible. Judging by the words of PRC President Xi Jinping at the Vladivostok Eastern Economic Forum, top-down political pressure has driven the Altay pipeline agreement on this front.

Graph 1. Chinese Gas Consumption vs Own Production 1970-2017.

(Click to enlarge)
Source: BP Statistical Review of World Energy 2018.

For several years it seemed that with the slowing down of Chinese gas demand growth – falling from double-digit growth between 2003 and 2013 (see Graph 1) to a mere 3.4 percent and 7.5 percent in 2015 and 2016 - the emergence of plentiful LNG sources in the Asia Pacific region could largely satisfy China’s appetite for additional gas. But the Altay pipeline was rejuvenated by Beijing’s adoption of stringent rules for coal-to-gas switching and, generally, its stricter stance on environmentsl regulations and air pollution. This led to a 15 percent y-o-y increase in Chinese gas demand in 2017 and will bring about a further increase of about 12-13 percent in 2018.

There are several underlying factors for why China opted for a safer, albeit price-wise more risky, Russian variant and not for a ramp-up in LNG or Central Asian gas. There have already been several articles in the party-controlled Global Times (the English-language version of the Chinese Communist Party’s official newspaper, Renmin Ribao) decrying the irregular character of Central Asian gas imports, stating that Turkmenistan and Uzbekistan failed to deliver contracted gas volumes due to allegedly defective transmission infrastructure. The Chinese authorities concluded that it would be more expedient to rely on its main strategic energy partner, Russia, as this move makes significantly more sense politically. Related: Diesel Demand Is Set To Soar

If Beijing has learned anything from the U.S.-China political standoff of the past few months, it is that under current circumstances it would be irresponsible to depend too much on U.S. energy supplies. The White House makes little secret of its intent to use LNG as a geopolitical weapon against its foes. Even with all the difficulties that are on the horizon for the Altay pipeline, Beijing has plenty of geopoltiical reasons to see this project through. It has refrained from placing tarrifs on U.S. LNG but has decided to make the pivot towards Russian pipeline-supplied volumes instead. With Cheniere Energy being the only U.S. LNG exporter to have a long-term sales contract to China, Beijing made sure any additional ramp-up of U.S. LNG exports is to be kept at bay.

The fact that Xi Jinping has demanded the commercial issues are sorted out as soon as possible does not automatically mean that the Altay pipeline will proceed in its current form. For instance, it might be rerouted through Mongolia, which has long been lobbying for such a detour. The reason is twofold – Mongolia’s terrain is flatter than the Altay Mountains (doubly useful considering the region’s moderate seismic risk) and allows for the shareholders to avoid UNESCO world heritage sites. In fact, UNESCO voiced its disapproval with the construction of a possible pipeline through the pristine Altay Mountains back in 2013. China’s reliance on Russian energy sales – be it crude (ESPO), gas (Power of Siberia, Altay, Yamal LNG and Arctic LNG-2) or coal – apears to be increasing by the day.


By Viktor Katona for Oilprice.com

More Top Reads From Oilprice.com:

Download The Free Oilprice App Today

Back to homepage

Leave a comment
  • Steven Conn on September 17 2018 said:
    Well, it is true that LNG imports are more expensive than piped gas from Russia, so this is what ought to be compared. In East Asia LNG imports are even more expensive than in Europe. China's growing consumption is enough to take in Russian and Central Asian gas, once additional lines are built, so I don't think they are in sharp competition. If China consumed 250 bcm last year, even an annual 5% increase in consumption (a conservative estimate) would add 12-13 bcm of additional imports per year.
  • Bob Jones on September 18 2018 said:
    Fantastic article thank you

Leave a comment

EXXON Mobil -0.35
Open57.81 Trading Vol.6.96M Previous Vol.241.7B
BUY 57.15
Sell 57.00
Oilprice - The No. 1 Source for Oil & Energy News