China and Russia’s $400-billion gas mega-deal hardly means game over for Canadian LNG
MARK RALSTON/AFP/Getty ImagesFor Canadian producers eager to extract their natural gas bounty to serve Asian markets, China just improved its bargaining power by signing a 30-year agreement with the Russians. Above, Russian President Vladimir Putin (L) is greeted by Chinese President Xi Jinping before the opening ceremony at the Expo Center at the fourth Conference on Interaction and Confidence Building Measures in Asia (CICA) summit in Shanghai this week
With its US$400-billion deal this week to supply natural gas to China, Russia has leapfrogged Canada and other would-be LNG exporters seeking to do business with the Asian nation. But Beijing has made it clear it will not be a pawn in Moscow’s great global gas game.
The 30-year agreement to provide 38 billion cubic metres a year to China certainly has global ramifications and opens up a ‘new Europe’ for Russia, notes energy consultancy Wood Mackenzie. Russia has used its oil and gas superiority as a weapon against weaker European states that rely heavily on its energy.
“With European gas demand growth uncertain and the Ukraine crisis leading to calls for Europe to reduce its reliance on Russian gas, Gazprom now needs a ‘new Europe’ — enter China,” said Stephen O’Rourke, global gas research analyst for Wood Mackenzie.
“It sets something of a benchmark,” said James Henderson, a specialist in the Russian oil and gas industry and a senior research fellow at the Oxford Institute for Energy Studies. “It’s the equivalent of Gazprom’s sales into the German market, which is the biggest market to Europe — so it’s a big deal.”
The deal sets a price at the China-Russia border
Gazprom expects to produce about 670 billion cubic metres of natural gas by 2020, so the China deal would make up roughly 5.5% of the state-owned company’s output.
For Canadian producers eager to extract their natural gas bounty to serve Asian markets, China just improved its bargaining power.
“It reduces the amount that other exporters would sell to China, and sets a price at the China-Russia border, which would imply a price of US$12-US$13 in Shanghai and Beijing — that sets a price precedent,” Mr. Henderson.
Still, it is hardly game over for new LNG proponents. Beijing would also be mindful that unlike Europe, it would never leave the keys to its energy security in Moscow’s hands. Reports that China is stockpiling crude oil to account for supply disruptions in the event of sanctions on Russia or geopolitical tensions in the South China Sea, underlines Beijing’s focus on security of supplies.
“There appears to be a desire and thrust to diversify your supply sources — so not put all your eggs in one basket,” said Mary Hemmingsen, partner management consultancy KMPG LLC.
China already sources substantial amount of natural gas from Turkmenistan, while it has invested in natural gas and LNG developments in Australia, East Africa and a host of other places.
In Canada, Chinese companies have committed to separate LNG proposals by Royal Dutch Shell Plc. and Petronas Bhd., and are also looking to develop the Aurora LNG via Nexen Inc., a unit of CNOOC.
THE CANADIAN PRESS/Jonathan HaywardIn Canada, Chinese companies have committed to separate B.C. LNG proposals by Royal Dutch Shell Plc. and Petronas Bhd. Above, British Columbia Premier Christy Clark waves after addressing a gathering during the LNG conference in Vancouver, B.C. on Wednesday.
“Many of the big buyers in Asia wish to have a diversified source of supply for gas, and the B.C. projects would offer that and have relatively low shipping costs to market,” said Patricia Mohr, economics and commodity market specialist at Scotiabank. “The B.C. projects will have to contain greenfield costs of development to be competitive. The Petronas-led project will most likely go ahead.”
Then there is China’s insatiable thirst for natural gas.
Chinese natural gas demand is set to grow by more than 2.5 times by 2020, reaching about 307 billion cubic metres, according to the International Energy Agency. By contrast, the country’s domestic production is set to grow by 0.8%, as shale gas production in the country remains disappointing.
China’s “war on pollution” could see additional demand for natural gas as it moves away from coal. This would also entail greater contribution of natural gas in power sector. Currently, natural gas accounts for 2% of power generation, and electricity demand is expected to double by 2025. About half of the new electricity supply in China could come from natural gas and all other generation sources, according to General Electric in a report on Chinese energy demand.
The natural gas share of China’s power market will triple by 2025,
“The natural gas share of China’s power market will triple by 2025, reaching 6% of generation,” said GE. “Gas demand in the power sector will increase to 117 bcm, representing 30% of total demand in 2025.”
Even if Gazprom gas starts flowing through the pipeline around 2018, China would still have a shortfall of 100 bcm of natural gas, which will need to be met by imports. However, Beijing’s superior bargaining position means it will likely pay less for natural gas compared to its Japanese and South Korean counterparts, who have fewer options.
Still, some analysts think the wave of natural gas investments in Russia may also prompt the country to dust off mothballed projects, especially as the deal could be ramped up to feed another 23 billion cubic metres to China.
“What is kind of really scary is now that they have signed this arrangement, the potential exists to construct yet another pipeline which would be either Siberian or Yamal pipeline,” said Peter Howard, president of the Canadian Energy Research Institute. “It could enter the market by 2020 timeframe, which makes it an even tighter gas market.”
While Moscow may be keen to cozy up to China, Beijing would be walking a fine balance between securing good deals and keeping its peace with the United States.
Associated PressIn this Monday, Nov. 15, 2010 photo, PetroChina workers perform their routine check on the Moxi Natural Gas Purification Plant in Suining in southwest China's Sichuan province.
“China does see both strategic and economic benefits in closer ties with Moscow, yet it is focused more on the economic side,” said Nicholas Consonery
, director of Asia at Eurasia in a note to clients.
“But the Chinese government will be much less keen to cast stronger ties with Russia as a rebuke to the West, preferring instead to seek closer ties with the U.S. and Europe as well,” Mr. Consonery said.
“Beijing’s need for balance in this regard, alongside some lingering mutual suspicion between Moscow and Beijing will limit the extent of deepening in the strategic relationship.”
No comments:
Post a Comment
Comments always welcome!