Monday, November 08, 2004

Who Gets the Gas?
Russian energy has grown in importance in the last few years, particularly in light of the country's tremendous performance in increasing its oil production, and its potential to do more. But Russian gas, backed by enormous reserves, should have a larger long term impact on the market than its oil. One country that stands to benefit from this is Japan, which desires to diversify its energy supplies and currently relies heavily on natural gas from Indonesia. But now China, with its rapid growth and insatiable appetite for raw materials, may snatch (subscription required) a plum that Japan had been counting on: the new gas reserves on Sakhalin Island, north of Japan.

ExxonMobil recently indicated that it was considering other options for its Sakhalin-1 project, which had previously been slated for a new pipeline to Japan. An LNG project or a pipeline to northern China may look at least as attractive, financially and strategically. But are there even better options no one seems to be considering?

The inevitable shift of the Asian gas industry toward Russia will create opportunities for a clever and sensible rebalancing of existing Asian gas markets. In this instance, might it make sense for Sakhalin gas to be committed to China contractually, but delivered to Japan in exchange for LNG already contracted to the latter? After all, Sakhalin sits just to the north of Hokkaido, the northernmost of Japan's major islands, while the rapidly growing cities of southern China are closer to Indonesian LNG plants than to Russian gas. Such exchanges are commonplace in the world of oil, but much less so for natural gas, with its longer contractual terms and higher infrastructure costs.

As natural gas grows in importance as a primary fuel for the region's economies, the development of a functioning gas spot market and a network of long-term logistical exchanges should follow as a natural outgrowth and an indication that gas has matured and outgrown its junior-partner status relative to oil.

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