- The recent natural gas deal between Russia and China involves volumes comparable to the gas production of the US Gulf of Mexico.
- Barring a major economic slowdown, meeting China's projected growth in gas demand will require this Russian gas, more LNG imports, and China's own shale gas.
$400 billion deals aren't announced every week--even by heads of state--although the new natural gas supply agreement between Russia and China had been in the works for some time. However, the crucial element of price apparently wasn't agreed until a negotiating session that lasted until 4:00 AM, Shanghai time. "Our Chinese friends are difficult, hard negotiators," said President Putin. They certainly waited for the right moment, with Russia pressed by sanctions in the aftermath of its annexation of Crimea.
The numbers are all impressive: After investing more than $50 billion in gas field and pipeline development in Eastern Siberia, Russia will sell 38 billion cubic meters (BCM) of gas per year to China for 30 years, and China will reportedly invest $20 billion for gas infrastructure and market development within its borders. Deliveries are set to start in 2018 and could eventually ramp up to 60 BCM/yr.
To put that in perspective, 38 BCM/yr equates to 3.7 billion cubic feet (BCF) per day. That's on par with the entire natural gas production of the Eagle Ford shale formation in south Texas, or the federal waters of the Gulf of Mexico. Of greater relevance is that it's also nearly twice the output of Australia's Gorgon LNG project, which is expected to begin production in 2015. So from the perspective of the regional gas market and alternative supplies, this is a very significant quantity of gas, especially with a number of new Australian LNG projects under development or consideration.
As of 2012 China's gas market was already the largest in Asia, ahead of Japan, based on BP's annual Statistical Review of World Energy. This deal represents 27% of China's current gas demand, so it's tempting to conclude that squeezing Russian gas into China must come at the expense of other potential suppliers. If China's gas market were mature, such a zero-sum view could not be ignored, particularly by marginal LNG projects in Australia, Indonesia and the US that have not yet begun construction.
Competition with Russian gas could also impede development funding and access to infrastructure for China's nascent shale gas industry. The US Energy Information Administration's 2013 global survey of technically recoverable shale resources found that China could have over a quadrillion cubic feet--1,115 TCF--of shale gas in the ground, or nearly twice as much as the US. Yet China's progress in tapping this resource has been slow, and hardly a week goes by without another article explaining why it will be difficult if not impossible for others to replicate the US shale gas boom any time soon.
The growth of demand will largely shape the competitive environment for gas in China. In 2012 natural gas accounted for less than 5% of the country's total primary energy consumption, compared to 13% for Taiwan, 17% for South Korea and 22% for Japan, none of which are significant gas producers. From 2007-12 China's gas market grew at a compound average rate of 15% per year. In their just-released Medium-Term Gas Market Report, the International Energy Agency (IEA) forecasts China's gas demand growing by 90% by 2019, while their latest World Energy Outlook anticipated it tripling by 2025 and quadrupling by 2035, eventually reaching 11% of energy consumption. Achieving that would require the equivalent of ten gas deals the size of this one.
That outcome isn't a certainty, for many reasons. Having all that gas turn up at the right time poses a massive logistical and capital investment challenge, and China's economy might slow further. Meanwhile, the price implied in the media coverage of the Russia/China deal is around $350 per 1000 cubic meters ($10 per million BTUs) or more than double the current US wellhead price. That's a lot cheaper than most of the LNG delivered to Asia, but it won't outcompete Chinese coal on economics alone, and it won't jump-start new, gas-reliant industries the way the US shale gas revolution is beginning to do.
The scale of market development implicit in the IEA's forecasts for China would require a substantial expansion of gas-fired power generation, which in any case is the logical complement to China's aggressive expansion of wind and solar power installations. It also entails a significant shift from solid and liquid heating and cooking fuels to gas, where at least in the case of liquids, $10 gas would have the edge over products derived from $100 oil. It might even encompass gas-based distributed power generation using fuel cells, which is still in its infancy in the US. Such developments will benefit all potential suppliers, not just Russia.
It's also worth considering what this deal means for Russia. While many reports have suggested it provides a counterweight to Russia's dependence on the European gas market, that's really only true in a financial sense. The deal represents a major growth opportunity for Gazprom, Russia's majority-state-owned natural gas company, but this isn't the same gas that now supplies the EU. It will mainly be production from new gas fields. The potential upside for Russia may depend on its ability to leverage the infrastructure built for this deal into a larger gas network for supplying growth throughout Asia--in competition with US and other LNG projects eyeing that market.
"Milestone" is an over-used term, but it fits this deal. If the parties can iron out all the remaining details and proceed to construction and ultimately delivery, it could prove to be a key step in giving gas a much bigger role in fueling Asia's growth. That would have important environmental benefits, in both mitigating the air pollution in Asia's major cities and reducing carbon emissions, perhaps by enough to bend the curve of the region's greenhouse gas growth.
The numbers are all impressive: After investing more than $50 billion in gas field and pipeline development in Eastern Siberia, Russia will sell 38 billion cubic meters (BCM) of gas per year to China for 30 years, and China will reportedly invest $20 billion for gas infrastructure and market development within its borders. Deliveries are set to start in 2018 and could eventually ramp up to 60 BCM/yr.
To put that in perspective, 38 BCM/yr equates to 3.7 billion cubic feet (BCF) per day. That's on par with the entire natural gas production of the Eagle Ford shale formation in south Texas, or the federal waters of the Gulf of Mexico. Of greater relevance is that it's also nearly twice the output of Australia's Gorgon LNG project, which is expected to begin production in 2015. So from the perspective of the regional gas market and alternative supplies, this is a very significant quantity of gas, especially with a number of new Australian LNG projects under development or consideration.
As of 2012 China's gas market was already the largest in Asia, ahead of Japan, based on BP's annual Statistical Review of World Energy. This deal represents 27% of China's current gas demand, so it's tempting to conclude that squeezing Russian gas into China must come at the expense of other potential suppliers. If China's gas market were mature, such a zero-sum view could not be ignored, particularly by marginal LNG projects in Australia, Indonesia and the US that have not yet begun construction.
Competition with Russian gas could also impede development funding and access to infrastructure for China's nascent shale gas industry. The US Energy Information Administration's 2013 global survey of technically recoverable shale resources found that China could have over a quadrillion cubic feet--1,115 TCF--of shale gas in the ground, or nearly twice as much as the US. Yet China's progress in tapping this resource has been slow, and hardly a week goes by without another article explaining why it will be difficult if not impossible for others to replicate the US shale gas boom any time soon.
The growth of demand will largely shape the competitive environment for gas in China. In 2012 natural gas accounted for less than 5% of the country's total primary energy consumption, compared to 13% for Taiwan, 17% for South Korea and 22% for Japan, none of which are significant gas producers. From 2007-12 China's gas market grew at a compound average rate of 15% per year. In their just-released Medium-Term Gas Market Report, the International Energy Agency (IEA) forecasts China's gas demand growing by 90% by 2019, while their latest World Energy Outlook anticipated it tripling by 2025 and quadrupling by 2035, eventually reaching 11% of energy consumption. Achieving that would require the equivalent of ten gas deals the size of this one.
That outcome isn't a certainty, for many reasons. Having all that gas turn up at the right time poses a massive logistical and capital investment challenge, and China's economy might slow further. Meanwhile, the price implied in the media coverage of the Russia/China deal is around $350 per 1000 cubic meters ($10 per million BTUs) or more than double the current US wellhead price. That's a lot cheaper than most of the LNG delivered to Asia, but it won't outcompete Chinese coal on economics alone, and it won't jump-start new, gas-reliant industries the way the US shale gas revolution is beginning to do.
The scale of market development implicit in the IEA's forecasts for China would require a substantial expansion of gas-fired power generation, which in any case is the logical complement to China's aggressive expansion of wind and solar power installations. It also entails a significant shift from solid and liquid heating and cooking fuels to gas, where at least in the case of liquids, $10 gas would have the edge over products derived from $100 oil. It might even encompass gas-based distributed power generation using fuel cells, which is still in its infancy in the US. Such developments will benefit all potential suppliers, not just Russia.
It's also worth considering what this deal means for Russia. While many reports have suggested it provides a counterweight to Russia's dependence on the European gas market, that's really only true in a financial sense. The deal represents a major growth opportunity for Gazprom, Russia's majority-state-owned natural gas company, but this isn't the same gas that now supplies the EU. It will mainly be production from new gas fields. The potential upside for Russia may depend on its ability to leverage the infrastructure built for this deal into a larger gas network for supplying growth throughout Asia--in competition with US and other LNG projects eyeing that market.
"Milestone" is an over-used term, but it fits this deal. If the parties can iron out all the remaining details and proceed to construction and ultimately delivery, it could prove to be a key step in giving gas a much bigger role in fueling Asia's growth. That would have important environmental benefits, in both mitigating the air pollution in Asia's major cities and reducing carbon emissions, perhaps by enough to bend the curve of the region's greenhouse gas growth.
A different version of this posting was previously published on the website of Pacific Energy Development Corporation.
2 comments:
Yes I too hope that this deal helps every one. Russia and china should help others too with it.
Could it be that Putin will be very happy with sanctions imposed by Europe? It may give him the trigger to cut gas to the Europeans in favour of China.
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