Russia’s Gazprom Might Be Regretting Its Oil Export Deal With China

Russia Gazprom China

Russian energy firm Gazprom is facing mounting challenges thanks to a tightened market and political tensions with Europe.

Gazprom’s massive $400 billion, 30-year export deal with China, signed last year, is also being questioned by analysts today with Morgan Stanley projecting that delays will push the start date for oil exports from Russia to May 2019, almost a year behind schedule.

According to the Morgan Stanley note, “the final deadline for the project coming on line is now May 2021.” It adds that “in late July, China reportedly suspended a second pipeline, this one planned to pump 30 bcm per year from Western Siberian gas fields to China’s norther-western Xinjiang region.”

That comes after the Russian economy ministry projected an historic low for natural gas production. And Gazprom’s market valuation is only 17% of where it stood seven years ago, before the global financial crisis.

That’s in part due to a steady fall in oil prices over the past year. Brent Crude started to drop just after Gazprom signed its deal with China in spring 2014, falling by 56% since.

But a big part of the company’s problems are also political, with Chris Weafer of consultancy Macro Advisory telling AFP that “what remains to be seen is whether Gazprom becomes an appendage of the foreign ministry or evolves into a global energy company.”

But as AFP reported this weekend, sanctions imposed by the United States and Europe have hobbled Gazprom’s pursuit of global expansion. With its long-time market in Europe cut off thanks to tensions over Moscow’s move into Ukraine, that expansion is an economic necessity.

One specific way those sanctions have hurt Gazprom’s efforts in Asia:

Washington’s ban on technology transfers to Russia for certain energy projects, including Gazprom’s Yuzhnoye Kirinskoye field in the far eastern Okhotsk Sea, is stifling Moscow’s ambitions on the Asian market.

Gazprom was set to use the field to develop its liquefied natural gas (LNG) production capacity and, according to some reports, exchange assets with Anglo-Dutch company Shell.

Adding to Gazprom’s troubles, the Financial Times reported last week that the energy firm’s 30-year contract with China does not offer any protection against falling prices.