Will Russia-China Gas Deal Really Change Global Gas Market?

Oil Pro ^ | 5/27/14 | Allen Brooks

[thackney]

Last week as part of a high-profile visit to Shanghai, China and before the start of the equally high-profile St. Petersburg Economic Summit, Russian President Vladimir Putin and Chinese President Xi Jinping oversaw the agreement of a 30-year deal for natural gas supply from Russia to China. The announcement of an agreement to the terms of this deal, which has reportedly been negotiated off and on for nearly a decade, set off shock-waves within the global natural gas market and sparked U.S. politicians' calls for speedier approval of the backlog of liquefied natural gas (LNG)export terminal projects. These faster approvals are seen by politicians as a way for the U.S., currently enjoying a boom in natural gas output, to help its European friends who are heavily dependent on Russia for gas supplies and facing higher energy costs and potential cessation of supplies. Some energy analysts have suggested that this deal sets in motion a trend to lower gas prices in the Asian market, the locus of the highest gas prices on the globe, and the stimulus for the rapidly expanding LNG business. Will the Russian-Chinese gas deal really result in all these events happening?

The new gas deal involves Russia shipping 38 billion cubic meters (3.7 billion cubic feet) per day to China starting reportedly in four years (2018). We have seen Russia's energy minister suggesting that the project will start up within a 4-6 year window, or possibly not until 2020. The total value of the contract is estimated at $400 billion, putting the gas price, the primary bone of contention for the past decade, at $350 per cubic meter, or roughly $9.90 per thousand cubic feet. The price is about 8% below what Russia charges its European clients, but 9% below what China is paying for gas from Central Asia. China still needs to build a $20 billion pipeline to reach the Russian output. In addition, it will loan Russia $55 billion to complete its pipeline and develop the gas supply. If we factor in the $75 billion in infrastructure costs paid for by China, that raises the contract value by 19%, or the implied gas price to $11.75/Mcf.

One concern we have about this deal is whether the cost and timing are realistic. We think it is instructive to look at what has happened to the LNG projects offshore Australia where initial cost estimates have exploded over the past several years as the actual construction work in conducted. There have been significant warnings about impending skilled labor shortages for all the petrochemical and energy industry facility expansions planned for the Gulf Coast. If the cost estimate and/or timing of the project are off, the cost of the gas for China will be much greater than presently projected, or might this condition lead to Russia having to bear the brunt of cost over-runs? That is an aspect of this agreement we haven't heard about in the reporting of the deal.

While it is popular among proponents of greater LNG exports from the U.S. to use the Russia-China gas deal to pressure the government for faster approval of the export terminal proposals that have been filed, it will do little to help reduce European dependency on Russian gas supplies in the near-term. Of the handful of export terminals with approval from the Department of Energy, only one has the remaining approvals in order to allow construction. The latest terminal receiving its second regulatory approval will not have that approval finalized until later this summer. That terminal still needs additional approvals suggesting that construction is not likely to begin before 2015. If the Energy Department yields to the political pressure to approve all the export terminal requests, it is likely that the industry still wouldn't be in full construction mode before 2015 or 2016, meaning that export volumes of size would not be available until 2017-2019, or at about the same time the Russian- Chinese project is targeted to be in operation.

It seems to this analyst that the pressure for the Russian-Chinese deal was really to strengthen Mr. Putin's hand when he meets with U.S. President Barack Obama and German Chancellor Angela Merkel at the 70th anniversary of the D-Day landing in France on June 6th. Once again, energy plays a role in geopolitics. That doesn't mean that we should dismiss the potential for significant gas market impacts in the Asia region from this deal, but those impacts will be years in the future. The political significance of the deal shouldn't be underestimated as the primary driver for the deal.

[tcrlaf]

Ukraine to Pay Its $2 Billion Gas Bill to Russia’s Gazprom

After Russia threatened to halt Ukraine’s natural gas service over an unpaid bill, Ukraine has finally agreed to pay back their debt. After some negotiation over the sum of the debt, they settled on a bill of $2.5 billion
http://news.yahoo.com/ukraine-pay-2-billion-gas-bill-russias-gazprom-144042836.html

Putin is winning in the bigger game, and he knows it. It will be interesting to see what happens when Obama and Putin get on the same stage.

[thackney]

So they are paying 71¢ per dollar owed?

I wonder how much the US will actual pay of the bill...

[tcrlaf]

Well, we’ve already “granted” them at least a couple of hundred million dollars, and we back some 60% of World Bank loans.

[mac_truck]

I wish the United States had a president interested in promoting a huge energy project that would create jobs and infrastructure instead of protecting grasshopper habitat in the Midwest.