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Vol. 19, No. 22 Week of June 01, 2014
Providing coverage of Alaska and northern Canada's oil and gas industry

Deal ruffles LNG world

Russia-China natural gas contract gives Putin a Plan B if Europe turns off taps

Gary Park

For Petroleum News

Having apparently decided they are again “new” best friends, Russia and China have struck a landmark natural gas deal that has shaken up carefully emerging global LNG plans.

Vladimir Putin and Xi Jinping, presidents of the two countries that are at odds on many fronts with President Barack Obama and the European Union, announced the breakthrough pact after a decade of failed negotiations.

The deal will see Russia deliver US$400 billion worth of gas to China over 30 years, setting in motion US$55 billion of Russian investment to develop the huge gas fields of Eastern Siberia and 2,500 miles of pipelines, with China pumping in an additional US$22 billion.

“This is the biggest contract in the history of the gas sector of the former USSR,” crowed Putin after his state-controlled Gazprom inked the deal with China National Petroleum Corp.

In the process he demonstrated that Russia is not without options in the event that Europe starts pulling out of its gas contracts with Russia in protest against the military faceoff in the Ukraine.

Politically, Putin can demonstrate that Russia “is not completely isolated because of the Ukraine crisis ... and that it has a very reliable strategic partnership with China,” said Keun-Wook Paik, senior research fellow at the Oxford Institute for Energy Studies.

That point was hammered home at the Asian security conference Putin was attending in Shanghai that includes Russia, China and Iran, but excluded the United States.

“All of a sudden it is going to be a very competitive global gas market,” said Trevor Sikorski, head of natural gas, coal and carbon at the consulting firm of Energy Aspects.

The Paris-based International Group of Liquefied Natural Gas Importers noted that Chinese imports of LNG rose 27 percent in 2013 to 18.6 million metric tons, making it the world’s third-largest importer behind Japan and South Korea, and destined to surge ahead if the new arrangement involving imports of 38 million metric tons falls into place.

Change in playing field

“The deal changes the level playing field,” said Thierry Bros, an analyst at Societe Generale. “China has secured some new gas at a competitive price. This means that new LNG” will need to compete at that level for projects to go ahead.

The volume of gas involved would be the equivalent of three of the largest LNG export proposals under consideration in British Columbia, said Andy Calitz, chief executive officer of LNG Canada, the Shell-operated partnership that has put a price tag of C$12 billion on its plan to start exporting 12 million metric tons a year in 2019-2020.

Although the pricing details of the pact were not disclosed, analysts have put the purchase cost at about US$10 per thousand cubic feet compared with the US$15-$14 Asian customers are currently paying for LNG imports, suggesting that Russia might have settled for less money than they should have from Beijing’s skilled negotiators.

For Russia, the sales of 38 billion cubic meters a year will open the door to the world’s fastest growing gas market, with the International Energy Agency predicting China’s gas consumption will rise by 6 percent a year through 2035. Currently, China imports about 20 billion cubic meters of year of LNG from 11 countries, led by Qatar and Australia, plus 21.4 billion cubic meters of piped natural gas.

Impact unclear

What the impact will be on a crowded field of LNG proposals, including 13 that are in the works in British Columbia, is unclear.

Peter Howard, president of the Canadian Energy Research Institute, said the agreement may sideline some of the “marginal” ventures by reducing the Chinese demand that would have been met by LNG.

He said it adds to the complications for LNG proponents in Western Canada, the western United States, Gulf of Mexico, Australia and Mozambique, who are among about two dozen countries jostling for a share of the Asian market, but observed that Japan and South Korea will remain major LNG importers.

In particular, the scope of the Russia-China deal is expected to harden positions on LNG prices, especially among Asian customers who have formed an alliance to drive down the peak contracts of US$15-$18 per million British thermal units, compared to the US$8-$10 paid in Europe.

Bill Gwozd, senior vice president of gas services at Ziff Energy (a unit of Solomon Associates), was emphatic that the deal will have no impact on Canadian projects that can operate profitably at prices of US$10-$13 per million Btu.

He also argued that it makes sense for China to diversify its supply sources and “not risk having a pipeline (from Russia) turned off in the middle of winter and your people freezing in the dark.”

Kvisle: Volume won’t swamp market

Hal Kvisle, chief executive officer of Talisman Energy, one of Canada’s leading gas producers, said the deal should not ruffle Canada.

“It’s not a quantity of gas that’s going to swamp the market,” he said. “It certainly doesn’t shut the door on LNG exports from Canada.”

Under the new arrangement, Russia aims to start delivering gas into northeastern China by 2018, at least a year sooner than any of the major projects, edging at least a year ahead of the most advanced British Columbia project by Malaysia’s Petronas.

However, British Columbia Natural Gas Development Minister Rich Coleman said senior officials of LNG companies working in the province told him at an LNG conference in Vancouver May 21 they feel British Columbia can compete with the Russia-China price for delivered LNG.

He said most of the major Chinese cities that would receive LNG from British Columbia already have the infrastructure in place.

Coleman said the two or three companies working toward final investment decisions in British Columbia remain very optimistic and have demonstrated they are serious by spending C$1 billion to C$2 billion on engineering, site work and pre-planning.

British Columbia Premier Christy Clark told the Vancouver conference that her government has staked out its promise to be a reliable partner, which means it won’t play politics with energy.

“I’ve never said that British Columbia would be the only supplier of natural gas to any country,” she said, while insisting the province can meet the desire of LNG customers to have only “one reliable supplier in their portfolio.”

“I don’t think there is a country in the world today that wants to depend on Russia as their sole supplier of natural gas,” Clark said.

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