Chayanda FID Creates Momentum For Eastern Gas Programme
In line with Russia's economic pivot towards Asia, Gazprom has pledged to invest US$38bn in the development of the eastern Chayanda gas field and the construction of a pipeline to the Pacific port of Vladivostok. The US$24bn earmarked for the pipeline construction is in line with our view that the bulk of demand for greenfield infrastructure projects in Russia is being generated by the minerals and hydrocarbons sectors, which has come from the government's desire to unlock resources in the Far East. We believe that the oil and gas and mining sectors will have lucrative spillover effects on Russia's energy and utilities sector (we forecast 6.5% real growth in oil & gas pipelines infrastructure industry value for 2013), which will bolster total construction output.
|A Push For Auxiliary Infrastructure|
|Oil & Gas Infrastructure Industry Value (US$bn), Real Growth (%)|
The Geopolitical Shift
The decision to look eastward and export to Asia comes amidst continued tension between Russia and its historical trading partners in Europe. The European Commission's antitrust investigations into alleged unfair pricing and blocking of supply, coupled with a decreasing overall demand on the back of the global economic downturn, new supplies from Middle East and North Africa and the shale gas boom closing the North America market, have prompted Gazprom to take on this geopolitical shift.
The final investment decision (FID) for the development of the Chayanda oil & gas condensates field and auxiliary infrastructure is a milestone in Russia's plans to unlock the resource potential of the Far East. The construction of the pipeline will de-risk the upstream project, while the development of the field facilitates the FID for the Vladivostok LNG export terminal, which we expect will happen in early 2013 ( see our online service, September 20 2012, 'Gazprom To Act Quickly To Realise Eastern Promise').
The multibillion dollar commitment to the project underlines the government's strategy towards creating a new market in Asia that will diversify its export base, while also monetising its resources in the Far East. According to the government's plans, this is the first in a series of upstream and midstream projects in the Far Eastern provinces of Russia that will eventually create a major natural gas hub around Yakutia, which will eventually be integrated with the Western provinces and production centres. The second phase to this broader venture will be the development of the Kovykta field in the Irkutsk region.
Under revised plans first oil production from Chayanda will begin in 2014 and gas in 2017, with a total investment of RUB430bn (US$13.7bn). The government granted Gazprom the concession for Chayanda in 2008. The field has proven gas reserves of 1.24 trillion cubic metres (tcm) and 370mn barrels of oil (bbl).
Gas from the Chayanda fields, which the new pipeline will transport and which will be processed in Vladivostok, would most likely target Japan (which is a probable partner in the construction of Vladivostok LNG), but also South Korea, China and India. If the Chayanda project proceeds as planned, we believe that the entire Eastern Gas Programme will gain momentum, opening up opportunities for investments in midstream infrastructure, specifically pipelines and LNG terminals.
|From West To East|
|Gas Transmission System In Eastern Russia|
In Line With Forecast
We have already highlighted Russia's vast, untapped, mineral wealth in the Far East as the most powerful factor for the development of greenfield projects in energy and utilities. The FID for Chayanda reinforces this view. According to our latest forecast, the energy and utilities infrastructure industry value will see a strong 6.5% real growth in 2013, and a healthy annual average real growth of 5.1% between 2012 and 2017 .