MOSCOW/BEIJING Russia is likely to scale back volumes of gas it plans to ship to China later this decade, sources close to energy giant Gazprom say, due to the dive in global energy prices and uncertainty hanging over the Chinese economy.
The sources insist the hugely expensive pipeline project - part of President Vladimir Putin's strategic shift eastwards - will go ahead on time. However, they acknowledge sales to China will initially be lower than envisaged when Moscow reached the $400 billion (279 billion pound) deal with Beijing in May 2014.
"We will start fulfilling the deal in 2019, but the volumes could be less that initially expected," a source at Gazprom (GAZP.MM) told Reuters.
At the time of the deal, crude oil was trading above $100 a barrel but has since plunged to $30. In this period growth in the Chinese economy has also slowed sharply, with its currency falling and its stock market now in turmoil.
Moscow is keen to "pivot to the East" to reduce its reliance on exporting energy to the West due to a series of rows, notably over Russia's annexation of Crimea and support for separatists in eastern Ukraine.
China is in a buyer's market. Abundant energy supplies are now available from other sources, such as liquefied natural gas (LNG) from Qatar and Australia and pipeline gas from Central Asia, and this is undermining the Kremlin's plans.
Gazprom's media relations team did not comment on emailed questions from Reuters although the state-controlled company, which has a monopoly on Russian pipeline gas exports, has said the project to ship gas from eastern Siberia to China is on track.
Flows through the Power of Siberia pipeline, which starts in East Siberia, are due to start at 5 billion cubic metres (bcm) of gas, rising to 38 bcm annually under the 30-year deal - just below what Gazprom's top gas buyer, Germany, now gets.
The pricing mechanism for what China will pay has not been revealed. Sources and analysts say the oil breakeven price for the Russian gas exports to China is around $80 per barrel, a level that is unlikely to be reached in the foreseeable future.
"In any case, the volumes will be lower (than announced)," said another source, who is close to Gazprom and familiar with the talks with China. "Gazprom has taken on an uphill task and failed."
TURKMENISTAN BEATS RUSSIA TO MARKET
Several industry sources have said Gazprom was hoping to sell gas to China for $10-$11 per mmBtu - an energy measure. By contrast, China is understood by analysts to be paying $9 per mmBtu to Turkmenistan, the former Soviet republic in Central Asia that beat Gazprom to the Chinese market.
No one knows where energy prices will be at the end of this decade or what state the Chinese economy will be in. But all bets seem to be off for now after oil's 70 percent plunge in the past 18 months. Benchmark Asian spot LNG LNG-AS is trading at $6.50, down from over $13 in May 2014.
Analysts see a delay as the likely outcome. "The parties are likely to postpone the project commissioning into the late 2020s," Mikhail Korchemkin, a director of U.S.-based consultancy East European Gas Analysis.
He sees the breakeven price for Russian gas exports to China, as measured by the benchmark Brent crude price LCOc1, at $75-$85 per barrel - but only if the pipeline construction is done by Chinese contractors, whose involvement promises to cut costs.
It is not clear whether Moscow will accept foreign contractors or will insist on Russian firms doing the work on its territory.
Gazprom had initially planned to invest $55 billion (38.35 billion pound) in exploration and pipeline construction to China's border. The costs may have since been cut due to a slide in the rouble's value which has pushed up the cost of imported equipment.
The project includes building a huge gas processing plant needed to provide methane of the required quality and clear it of helium, which is abundant in the east Siberian gas fields.
In a sign of increasing difficulties for the Kremlin's energy champion, sources have said Gazprom has asked other Russian gas producers to help it out to honour the deal.
Chen Zhu, Beijing-based managing director of consultancy SIA Energy, said the economic turmoil in China makes the project less attractive. "There is no doubt the project is strategic but on the China side, the demand outlook is not that rosy as the economy is slowing," she said.
Chen said 2020 is a more realistic date for gas to start flowing. "Due to very high costs required to develop the large gas fields in Russia, China and Russia share the understanding that neither side is in urgent need," she said.
The Oxford Institute for Energy Studies also said in research published in September that Beijing was in no rush to allow Russian gas into its market.
"It would increasingly appear that Gazprom is at the mercy of its Chinese counterparts, who are operating in a buyers' market, have the lure of financing to offer, and have every incentive to adopt a wait and see policy in gas import negotiations," it said.
(Writing and additional reporting by Vladimir Soldatkin; editing by David Stamp)