Despite difficult economic and political situation in the world Russia and China continue strengthening power interaction. PAO Gazprom and China National Petroleum Corporation (CNPC) act as locomotive on this direction.

As a result of this cooperation the Gazprom Group can turn in the largest exporter of natural gas into the People’s Republic of China in the near future. In turn, CNPC will cardinally strengthen energy security of the country.

Power imbalance

China today is one of the most dynamically developing economies and the largest country of the world on the population that defines also its positions in the global energy market. The world economic crisis proceeding since 2008 came and to the People’s Republic of China though it is necessary to recognize that stability to it of China which is considered as a developing country was higher than even at the states recognized as developed. Nevertheless following the results of 2015 growth rates of GDP of the People’s Republic of China were reduced to 6.9% that became the lowest indicator for the last 25 years.

Meanwhile forecasts of high government officials of the People’s Republic of China say that in 2016 GDP growth of the country will make no more than 6.5-7% and in the next five years will hardly rise higher than 6.5%. The whole complex of problems of system character in economy of China is the reason of it. Not the last role is played here also by a strong distortion in structure of an energy balance of the country.

The People’s Republic of China is the world’s largest consumer of energy. Last year, according to the British oil and gas company BP, 23% of all volume of world consumption accounted for its energy resources share in total 3.014 billion tons of oil equivalent, or nearly. For comparison, at the same time in the USA this indicator made 2.28 billion tons (17.3%).

On consumption of the majority of energy carriers China wins the first place in the world or enters the five of leaders. However one of the main problems of the People’s Republic of China still remains excessive domination of coal in a basket of goods of energy resources against the lowest share of other power sources and the first of all natural gas. So, coal in power balance of China occupies about 63.7%, oil – 18.6%, hydropower – 8.5%, natural gas – 5.9%, renewables – 2.1%, nuclear power – 1.2%.

However, there is nothing surprising in it, after all now the People’s Republic of China is not able to provide completely the needs for energy carriers, using only own energy resources. As an exception here, perhaps, it is possible to consider just coal and that with big reservations. According to the State statistical bureau of the People’s Republic of China, reserves of coal of China are estimated within 236 billion tons. At the same time, according to BP considering only those stocks which development not only is technically feasible in the statistics but also it is economically profitable, this indicator makes only 114.5 billion tons. At present level of production of coal in the People’s Republic of China these stocks will be enough for no more than three decades. However it is necessary to consider also that China already imports considerable volumes of coal. For example, in 2015 production of coal in the People’s Republic of China made 3.68 billion tons and its import of Australia, Indonesia and Russia is 158 million tons. Problem in that China already uses the majority of the energy resources if not to the limit (from the point of view of efficiency and profitability) but it is very close to it. And it concerns not only coal but also other power branches, with only that difference that their real potential is much lower.

So, taking the second place in the world on consumption of oil after the USA (consumption volume in 2015 made 851.6 million tons), China (559.7 million tons) became the pure importer of these raw materials in 1993. According to the Ministry of land and natural resources of the People’s Republic of China, recoverable oil reserves of China residual technically made for the end of 2015 3.496 billion tons (explored reserves, according to BP, — 2.5 billion tons). Thus own oil production of the People’s Republic of China last year reached 214.6 million tons, import — 335 million tons. Conditions of development of oil fields in China become complicated, quality of stocks falls, respectively, cost of production of raw materials grows. Meanwhile the Chinese consumers give preference to cheaper import of oil therefore purchases abroad increase. The peak of consumption of oil in China, as expected, will come in 2025-2030, by the end of this period volumes will reach 660 million tons a year. However on condition of more active development of the sphere of «pure» transport, including gas engine, the peak of consumption of oil can be passed earlier.

As for oil refining here China acts as one of the world leaders but in recent years the problem of excess capacities of oil processing becomes ripe in the country, export of oil products is increased. Now capacities for primary oil refining in the People’s Republic of China exceed 700 million tons a year whereas their loading does not reach even 70%. For example, in 2015 only 478 million tons of raw materials were processed in the country and 300.3 million tons of oil products are made.

On the volume of rated capacities of hydropower China is the indisputable leader. In 2015 they reached 296 GW that is more than a quarter of the universal. Their share also makes 21.2% of all rated capacities of electric generation of the People’s Republic of China. The volume of development of energy on hydroelectric power stations increased last year to 1 billion megawatt-hours. At the same time gradually the hydraulic power share in balance of the generating capacities of China will decrease, mainly because of the highest extent of use of water resources of the country.

On power generation with use of renewable sources, such as solar and wind energy, the People’s Republic of China also takes the leading positions in the world. An exception is made by bio-energetics in which the first place remains for the USA so far. In 2015 China increased rated capacities in the sphere of solar power on 15 GW — to 44 GW (nearly 20% of all rated capacities in the world) that allowed it overtaking Germany in this parameter. To the wind power of the People’s Republic of China added 31 GW last year, having brought the capacities to 145 GW. Despite obvious progress, the set of the problems constraining development of this direction remains here. For example, unevenness of work of wind and solar stations, which are compelled to stand idle considerable part of time for the objective reasons. But the main thing that they, even taking into account grants of the state, do not maintain any competition to thermal power plants. So, now the cost of generation of energy on solar power stations in China is 2.5-8 times higher than on coal and gas.

The established generating capacities of nuclear power in the People’s Republic of China made only about 15 GW by the end of 2014. 15 nuclear reactors operate in the country and construction of 30 new is conducted. It is supposed that by 2020 the total productivity of the NPP in China will be brought to the level of 53 GW, power generation on them will make 380 kilowatt hour (will increase on 3.2 times in comparison with present level). By 2030 the rated capacity of the Chinese NPPs will reach 136 GW, energy development — 1 trillion kilowatt hour (11.8% of electric power total production in the country). However today there are difficulties in obtaining permissions for construction of new blocks of the NPP while reactors of the third generation pass an assessment of economic efficiency and safety still remain. There is guarded relation to peaceful atom in the Chinese society after the Fukushima tragedy. Therefore in the near future the greatest prospects are connected with development of gas sector of China.

Gas sector

The taken reserves of traditional natural gas of China are estimated by the Ministry of land and natural resources of the People’s Republic of China at 5.194 trillion CBM, according to BP, explored reserves of People’s Republic of China gas (apparently, including also nonconventional gas) make 3.8 trillion CBM. In recent years continuous decline in quality of reserves of traditional gas is observed, a share of the hardly removable resources relating to low-permeability and ultralow-permeability breeds, and also number of fields with the high content of hydrogen sulfide and carbon dioxide, deposits of a complex geological structure grows. Average depth of productive layers increases. Including therefore growth rates of production of traditional natural gas since 2009 progressively decreased and last year for the first time for many years falling of its production for 0.4%, to 127.1 billion cubic meters was recorded.

At the same time production of slate gas in 2015 made 4.5 billion cubic meters in China, methane of coal layers – 4.4 billion cubic meters, synthetic coal gas – 1.5 billion cubic meters. Because of the difficulties connected with traditional natural gas, China makes considerable efforts on development of nonconventional resources. The Ministry of land and natural resources of the People’s Republic of China estimates now technically taken reserves of slate gas of China at 130.4 billion cubic meters and methane of coal layers is estimated at 306.4 billion cubic meters.

The works on production of methane of coal layers in the People’s Republic of China were conducted since the middle of the 1990th. The plan for 2011-2015 provided to bring its production to 16 billion cubic meters, but it was impossible to execute it despite various subsidies and privileges. Slow growth of production is connected with lag in technologies, low profitability of projects, and also the conflict of interests of the companies conducting production of methane, coal layers and coal on the same sites.

Development of resources of slate gas goes in China since 2006. The state companies, largest in the People’s Republic of China, — CNPC and Sinopec began implementation of «model» slate projects — according to Channin-Veyyuan and Yulin. For intensification of development of this direction some joint projects with foreign oil and gas companies, such, in particular, as the British-Dutch Royal Dutch Shell, the British BP, the French Total, the American ConocoPhillips and Hess Corporation were initiated. The authorities of China opened access to this sphere to the private Chinese companies. The prices are completely liberalized for slate gas from state regulation, various subsidies and privileges at the state and regional level are provided to participants of slate projects. However results were very modest. Planned indicators on production of slate gas for 2015 are 6.5 billion cubic meters — were unattainable. The Chinese slate projects left all foreign companies, except BP. The independent Chinese companies were actually not able to pull slate projects.

The «model» slate Yulin project became the largest within which last year 3.15 billion cubic meters of gas were made. Having restrictions on development of production and import of traditional gas, Sinopec set a task to become the leader in production of slate gas, having made in this project huge investments. So, last year it was directed 2.2 billion dollars that exceeded all costs of the company of exploration (1.6 billion dollars) to its development and practically coincided with total capital investments in the sector of processing and petro chemistry (2.3 billion dollars) taking a key place in business of Sinopec. Meanwhile the Yulin project becomes profitable only in the presence of the state subsidies at a rate of 0.4 yuans for each cubic meter of gas (62 dollars for 1000 CBM). It calls into question economic feasibility of development of such resources. Nevertheless current year the company assumes to increase the volume of mining capacities of the project (at the end of the 2015 will reach the level of 5 billion cubic meters a year) on 2 billion cubic meters, in the following — on 3 billion cubic meters. Thus outputs in 2016 can double in comparison with an indicator of the last year here.

The slate CNPC Channin-Veyyuan project last year provided production a little more than 1 billion cubic meters of gas. The volume of mining capacities makes about 2 billion cubic meters a year here.

Problems of implementation of slate projects in the People’s Republic of China are connected with difficult geological conditions, a deep water of a bedding and the high cost of wells caused by it (construction of a well within the mentioned «model» projects costs 10-13 million dollars; an average cost of a well on slate gas in the USA is about 4 million dollars), technological lag of China, deficiency of water resources and so on. An important role is played also by low prices of oil, sharply lowered income and investment opportunities of the oil and gas companies. Meanwhile the People’s Republic of China will continue promoting development of the resources of slate gas. However, breaks on this direction are removed for later terms now. If before it was supposed to reach the level of production of slate gas in 80-100 billion cubic meters by 2020, now — by 2030.

Production of synthetic gas from coals develops in China. Today three such projects are realized. But their participants face high prime cost of the received raw materials, its poor quality and serious ecological restrictions. Prospects of development of resources of gas hydrates and production of biogas in China are still only attentively studied.

However, it is already obvious now that even everything together the taken efforts on production of traditional and nonconventional gas will not allow the People’s Republic of China covering all needs for it. So, in 2015 the volume of consumption of natural gas in China reached 193.2 billion cubic meters, having increased in comparison with previous year on 5.7%. In the first half of the current year growth rates of consumption made already 9.8%. And not so long ago the Institute of economy and the CNPC technologies published «The report on development of world power and power industry of China for the period till 2050″ in which gave the forecast that demand for natural gas will continue growing in the People’s Republic of China and by 2050 will come nearer to the current level of consumption of the USA (in 2015 — nearly 780 billion cubic meters). In particular, already by 2030 consumption of natural gas in China will increase to 510 billion cubic meters a year, by 2050 — to 710 billion. Thus average annual growth rate will not exceed 3.8%.

However already now more than 30% of the needs for natural gas the People’s Republic of China covers due to import which share continued its grows. Last year supply of foreign gas to the country, according to the Head customs office of the People’s Republic of China increased on 3.3% and reached 61.6 billion cubic meters — 55% were a share of pipeline gas, the rest — of the liquefied natural gas. In January-July of the current year import of gas to China grew in relation to the similar period of the last year on 19.6%. And increase in deliveries from abroad on gas pipelines made 23.4%, via the liquefied natural gas terminals — 14.9%. For ensuring the growing needs of the People’s Republic of China a number of strategic channels of import of gas — three gas pipelines Central Asia — China with a general productivity of 55 billion cubic meters and the Myanmar-China highway (12 billion cubic meters) and also 13 terminals of regasification of liquefied natural gas with a total power over 40 million tons (more than 50 billion cubic meters) a year is created and brought into operation.

Meanwhile one of the key problems constraining active development of gas industry of China still remains lack of the developed infrastructure for transportation, storage and distribution of natural gas. There is no uniform system of gas supply in the People’s Republic of China therefore, by the way, about 15% of the gas extracted in the country for further transportation and storage should be liquefied at plants on production of low-tonnage liquefied natural gas — today there are 164 of them, with a cumulative power of 91.3 million cubic meters per day. The authorities of the People’s Republic of China try to correct the situation. The solution of this problem will be promoted by implementation of projects of deliveries to China the Russian gas.

Russia — China

Active negotiations on possibility of supply of gas from Russia to China began in the middle of the 2000s. However these plans started to get real features by 2009 only when PAO Gazprom and CNPC in result concluded the Framework agreement on the main terms of delivery of natural gas from Russia to China assuming export on the Chinese market to 68 billion cubic meters of gas annually. Two possible routes of deliveries — «western» and «east» were initially considered.

The first route provided connection of the operating fields of hydrocarbons of Gazprom in Western Siberia with the Chinese gas transmission system via the new Altai gas pipeline capacity for export to 30 billion cubic meters of gas a year. Subsequently the project received the name Force of Siberia — 2. The second – building of export branch to China with productivity up to 38 billion cubic meters a year from the new system of gas pipelines (today is Force of Siberia project) created in Eastern Siberia on the basis of the new centers of gas production which are just formed Gazprom — Yakut and Irkutsk.

In September, 2013 Gazprom and CNPC signed the Agreement on the main conditions of pipeline supply of natural gas from Russia to China along «east» route, and in May 2014 concluded the corresponding contract for delivery of 38 billion cubic meters annually for the period of 30 years. Now the parties conduct construction of export gas-main which end is supposed at the end of 2018. The first gas on it, as expected, will go from Russia to the People’s Republic of China in 2019.

Along the «western» route also for the period of 30 years Gazprom and CNPC signed the framework agreement on supply of the Russian gas to China in November, 2014, and in May of 2015 concluded the Agreement on the main conditions of pipeline deliveries, however commercial negotiations on this project still proceed. The Chinese party confirmed the initial plan to lay one gas pipeline on 30 billion cubic meters of gas a year. At the same time the parties keep the analysis of prospects of construction and the second thread for increase in total volume of deliveries to China in this direction to 60 billion cubic meters of the Russian gas annually.

In addition to it in September of last year Gazprom and CNPC signed the Memorandum of understanding on the project of pipeline deliveries to China of natural gas from the Far East of Russia and in June of this year — the Memorandum of understanding in the field of underground storage of gas and gas electric generation in the territory of the People’s Republic of China.

Now the parties study possibilities of ensuring supply of the Russian Far East gas to China. Road maps are approved for the fastest performance of the tasks set by the second memorandum. In particular, the analysis and assessment of geological, technological and economic conditions of creation of the underground gas storages (UGS) in the Provinces of Heilongjiang, Jiangsu and Zhejiang are carried out. For practical implementation of projects of UGS the joint venture will be created. Also the parties plan to study and define target projects from number offered by the Chinese party on gas generation of heat and the electric power for preparation of the decision on investments and a choice of the organizational and legal scheme of implementation of projects.

Also the plan of works on projects of gas generation which, in particular, provides studying of prospects of their realization in the northeast and the East of the People’s Republic of China is drawn up. The number of potential projects is defined and the working group for their analysis is created.