Stakes are big in Russia-China gas talks

Price, routing, participation all barriers to moving Russian natural gas to markets in China, whose import needs are growing

Bill White

Researcher/writer for the Office of the Federal Coordinator

One pipeline actually has been built between Russia’s Far East and China. It carries oil, not natural gas. It started up in 2011. The oil goes to northeast China.

The oil line negotiations featured a vastly different dynamic than the deadlocked talks on a gas project. Chinese loans helped fund the Russian development. A Chinese oil company built the pipeline’s China section. Russia got an oil price it wanted.

Paik, the Oxford researcher who has watched the Russia-China gas tug-of-war since the 1990s, said in a November presentation at a London conference that Sino-Russian gas cooperation has been stymied by Russia’s effort to replicate its experience with oil exports ... and China’s unwillingness to go along.

Various reports say Russia wants about $10 per million Btu of gas (about 1,000 cubic feet) while China has offered to pay about $7.

Russia’s price is roughly equivalent to what its European customers pay. Gazprom is under pressure to shave its European price, which is based on the cost of oil products there. If Gazprom goes soft on gas prices in Asia, that could weaken its hand in Europe.

In January 2013, Gazprom published a white paper, aimed at critics, explaining the sensibility and fairness of how the company prices export gas. It even quoted a Beatles’ song: “Living is easy with eyes closed, misunderstanding all you see.”

Chinese leaders have their own gas-price pressures. The government regulates prices at relatively low levels to gas users, such as power plants. Importers of expensive foreign gas are losing money on each transaction. The government is slowly moving to raise prices but worries that moving too fast could anger citizens and cool the economy. Further, as China relies more and more on imported gas, officials worry about the signal they would send to other foreign gas sellers if they agree to a high price for Russian gas.

(China got a world-class steal with its first LNG-import contracts signed about 10 years ago. It was an LNG buyer’s market back then. China’s first contracts linked LNG prices to oil prices, as is common, but set a ceiling on how high oil prices could rise before the LNG price flattened out. For Australia’s North West Shelf project, the oil price ceiling was $25 a barrel. For Indonesia’s Tangguh project, the ceiling was $38, according to the International Gas Union. As a result, these LNG shipments were initially priced at $3 to $3.70 per million Btu, levels that would hardly shock the economy. A spot shipment today from elsewhere could be priced as high as $19. Indonesia has been pressing China to pay more for its Tangguh LNG.

China’s big vision

That year China consumed an average of 2.4 bcf a day, covering it with about 2.6 bcf a day of production, according to the BP Statistical Review of World Energy. Natural gas provided less than 3 percent of China’s energy needs. Coal provided 61 percent.

Flash forward to 2011, after more than a decade of boom. China produced about 9.9 bcf a day on average and consumed 12.6 bcf a day. Imports covered the difference between the two figures. Natural gas provided almost 5 percent of China’s energy. Coal’s share was 69 percent.

(By comparison, the United States was the world’s top producer in 2011 at 63 bcf a day and top consumer at 67 bcf a day. Imports, mostly from Canada, covered the difference. Gas supplied 28 percent of U.S. energy, coal 22 percent.)

Now flash forward again into a future conceived by Chinese energy planners.

For 2030, they forecasted in November 2012, China will produce 44 bcf a day and consume 53 bcf a day. Natural gas will supply 12 percent of the nation’s energy.

Many China watchers, including Paik, greeted the forecasted 2030 production with great skepticism. Some said 29 bcf a day seemed more realistic.

China does have big plans for production. It envisions a natural gas trifecta of new onshore and offshore fields plus output from abundant — but largely undeveloped today — shale and coal-bed methane plays.

But if the country’s appetite for gas grows even faster than production — something just about everyone expects — China could become the world’s leading natural gas importer.

In a June 2012 forecast, energy consultancy Wood Mackenzie predicted China’s 2030 gas imports could reach at least 12.6 bcf a day. (Japan likely will import about that much this year.)

That gas will need to come from somewhere, Australia, Qatar, East Africa, Canada, the Lower 48 states, Alaska, and/or possibly Russia.

Russia’s bounty

Russia has the world’s largest proved reserves: About 1,680 trillion cubic feet — enough to supply the entire world all by itself for 15 years.

Russia is the world’s No. 2 producer, behind the U.S.: About 60 bcf a day. Russia could produce more if it could find the demand.

Russia is the world’s top exporter: Over 20 bcf a day — mostly to Europe.

But Russia is a bit player in the Asian gas trade. It exports a little LNG — an average of 1.4 bcf a day in 2011 — mostly to Japan but also to China, South Korea and other Asia destinations. The LNG comes from Russia’s Sakhalin Island development off its Pacific coast. Russia also has plans to pipe Sakhalin gas from the island for possible export to China, Korea, Japan and elsewhere.

Paik estimates Russia’s Far East reserves at 132 tcf in four major plays, plus another 167 tcf at Sakhalin.

“For Russia to achieve large-scale gas export to Asia, it needs to start developing the super-giant onshore gas fields in East Siberia without delay. But to do this requires securing a market of sufficient size to justify the infrastructure costs,” he wrote in his December 2012 paper.

Enter China.

In a sense, Russia would like to enjoy the gas role Canada plays with the United States. For decades Canada has shipped excess production from its wide-open, lightly populated western provinces to the United States, which doesn’t produce enough gas to meet its domestic needs.

China isn’t the only big Asian gas consumer Russia is eying. Leaders also discuss exports to Japan, South Korea and Taiwan. But China, arguably more than the others, needs to secure abundant new supplies, exactly what Russia has to offer.

China is the prize.

Part 1 of this story appeared in the Feb. 24 issue of Petroleum News. Editor’s note: This is a reprint from the Office of the Federal Coordinator, Alaska Natural Gas Transportation Projects, online at www.arcticgas.gov/stakes-are-big-russia-china-gas-supply-talks.