Could the Russia-China Gas Deal Trash Canada’s Export Dream?

Gavin Sutcliffe's picture
Gavin Sutcliffe, Head of Content, Global Energy Conferences & Gastech
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Russia’s increasingly-cordial relationship with China has led to the finalisation of the long-proffered agreement to connect the two countries via a gas supply pipeline. More than a decade of false dawns, overly-optimistic declarations and geopolitical wrangling have been finally settled, paving the way for Russia and China to conclude the deal in Beijing this week, when President Vladimir Putin visited his Chinese counterpart.

The $400 billion deal between CNPC and Gazprom is for 38 Bcm/year over a 30-year period, with the option to raise this to more than 60 Bcm if pipeline capacity reaches potential.

Reuters reported on 13th May that: “The energy sector is arguably the most attractive at this stage as China attempts to close coal-fired power stations and raise natural gas consumption by 11% this year.”

In a clear show of intent to the west, in the face of disastrous credit drains out of Russia since the escalation of the Ukraine crisis, Moscow wanted to prove that it has major gas customer options and few customers are more appetizing to the world’s largest exporter of piped gas than China.

Ironically, the wrangling over the past two decades often concerned pricing, and the lack of willingness on Moscow’s part to budge. But China is now gaining major concessions as Russia begins to appreciate the potential long-term impacts of the Ukrainian crisis with key customers in western Europe.

Implications for Canadian LNG? But what will this mean for Canadian LNG export dreams, and, in particular, British Columbia’s hopes to supply Asia with tens of millions of tonnes of LNG by 2020?

The key issue of pricing will be the most significant concern for Canada, which will pin hopes on being able to compete for Asian business and come in at a more competitive rate than is currently being paid at present (Japanese LNG, for example, has tipped past $14.50/MMBtu all year).

The new Russia-China deal is touted by market analysts to be set somewhere between $10-$11/MMBtu – which would deal a severe blow to Canadian hopes due to the significant capital expenditure and shipping costs that would have to be factored in to any potential long-term agreements with Asian customers, before construction of green-field export terminals have even reached final investment decision.

These prices would put China on a par with established European customers such as Germany, and although Gazprom is expected to barely break even at any rate under $11/MMBtu, it is likely that Russia was prepared to offer these lower prices in exchange for prepayment to boost much-needed national finances at a time when cash is flooding out of the country.

Nathan VanderKlippe, writing in Canada’s “Globe & Mail” recently noted: “Implicit in these plans are a challenge to the rest of the world, not least Canada. If Russia succeeds, it will displace gas supplies from other countries eager to sell to China. Academics and financial analysts say it stands to cut prices in the daily LNG trade by $2/MMBtu, a direct challenge to the profitability of potential export projects in Canada.”

Potential investors in Canadian LNG export plans need to watch Russia’s movements carefully and be prepared to make some tough decisions in the coming months if export plans are to come to fruition as many hope.