Sanctions not a problem for Gazprom

Russian gas giant Gazprom (MCX:GAZP) could tap a US-sanctions-hit field off the Pacific island of Sakhalin to supply gas to China under a recently signed deal, sources and analysts said on Tuesday.

Russia, already Beijing's third-largest gas supplier, has strengthened ties with China, the world's largest energy consumer, and reduced its dependence on its traditional European energy buyers amid a standoff with the West.

President Vladimir Putin on Friday announced a new gas supply deal with China that would boost gas exports from Russia's Far East, where the pipeline network is not connected to the traditional routes of fuel exports to Europe.

Gazprom announced that it has signed a long-term purchase and sale agreement with China National Petroleum Corporation (CNPC) for natural gas to be delivered via a Far East route.

If the project reaches full capacity, the volume of Russian gas supplies to China would increase by 10 billion cubic meters per year to a total of 48 billion cubic meters per year, including supplies via the existing Power of Siberia pipeline.

Gazprom has not disclosed sources of supply for the new deal. The company and CNPC have not responded to a request for comment.

Two sources said the gas could be coming from Sakhalin fields, including the Yuzhno-Kirinskoye field, which Washington sanctioned in 2015 over Moscow's role in the Ukraine crisis.

The field, which belongs to the Kirinsky Block in the Sea of ​​Okhotsk, also contains petroleum. The sanctions relate to the exploration or production of oil or natural gas in Russian deep sea areas.

The sanctions prevent foreign companies from tapping into such fields, and the possible gas exports from Yuzhno-Kirinskoye could show that Russia has learned how to circumvent the sanctions.

According to Moscow-based brokerage firm Sova Capital, the gas for the deal could come from the Kirinskoye field "or more likely from the Yuzhno-Kirinskoye field, which is scheduled to come on stream in 2023 or 2024."

According to Gazprom, Yuzhno-Kirinskoye's reserves amount to 711.2 billion cubic meters of natural gas, 111.5 million tons of gas condensate and 4.1 million tons of oil. Production there is estimated at 21 billion m3 per year.

"It will be Yuzhno-Kirinskoye, there is no doubt about that," a source said of the gas source for the new contract with China.

Gazprom said on its website that Yuzhno-Kirinskoye is in pre-development, with geological exploration completed within the field boundaries.

The Company also announced that the field was developed using semi-submersible rigs and is expected to be phased in over the period 2023-2025.

The Sakhalin-1 project is expected to start LNG production in 2028.

Gazprom's own LNG plant in the region, Sakhalin-2, does not have sufficient gas resources to ramp up production and set up a third production line.