Cautious note on CGH......130 Jun 2014 20:48
Shares of China Gas Holdings and its largest shareholder Beijing Enterprises Holdings have surged more than 10 per cent on the back of Russia's long-term natural gas supply deal with China that was signed last month, as they are seen as the biggest beneficiaries with substantial operations in China.
Investors' optimism is reasonable as the import deal effectively links the gas-hungry Chinese market to the world's largest gas exporter, Russia, securing long-term energy for Chinese distributors whose growth has been crimped by supply.
But the companies may have underestimated the risk of potential delays in gas delivery and the time it will take for output to ramp up. This could be a challenge for China Gas to hit its target to triple distribution volume with Russian gas in the next five financial years.
Macquarie Securities analysts said in a research report they expected Russian gas to start flowing to China in 2019 at the earliest and that a ramp-up to full capacity would take five years. This cautious view is in line with that of the Oxford Institute for Energy Studies, which is affiliated with Britain's University of Oxford.
"Russian [infrastructure] projects are typically over budget and late," the report said, which cited an even more conservative projection by industry consultancy Wood Mackenzie.
"Given the likely upstream development challenges and the fact that the gas would flow to nascent city gas markets, Wood Mackenzie expects 5 billion cubic metres (bcm) of gas supply via the 'Power of Russia' [pipeline] in 2020, and thereafter expects a gradual ramp-up to the contracted 38 bcm by 2025 - seven years later than what news headlines would suggest," Macquarie's report said.
Development of the Chayanda field, one of two supplying the pipeline, would be challenging because of lower density of the gas, which also adhered to underground rocks more tightly than gas in West Siberia fields, the report quoted Wood Mackenzie as saying.
Russian gas giant Gazprom last month signed a US$400 billion deal to export up to 38 bcm of gas annually for 30 years to northern China, and said gas was expected to start flowing in 2018 through a planned 4,000km pipeline.
The pipeline and the deal with China, whose gas demand could surpass that of Europe by 2025, according to a Sanford Bernstein research report, is key to Russia's goal to boost Asia's share of its gas exports to 31 per cent by 2035 from 6 per cent last year.
Its current gas exports to Asia are sold through a 14 bcm-a-year gas liquefaction facility on Sakhalin Island, east of the Siberian mainland.
According to Macquarie, East Siberia is sitting on about 3 trillion cubic metres of proven and probable gas reserves, enough to supply all of Asia for five years.
But a lack of infrastructure and more than a decade of tough gas price negotiations with China means the gas remains untapped.
http://www.scmp.com/business/commodities/article/1543249/timely-russian-gas-deli
Sign In
Follow the stocks
