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Russia-China gas deal more a threat to LNG pricing than volumes

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COLUMN-Russia-China gas deal more a threat to LNG pricing than volumes: Clyde Russell| Reuters

By Clyde Russell

LAUNCESTON, Australia, May 22 (Reuters) - Should developers of liquefied natural gas projects in Australia, the United States and elsewhere be worried by the $400 billion deal between Russia and China?

After all, China is the big hope for growth in LNG demand, with some forecasts calling for a tripling of its imports to more than 60 million tonnes per annum by 2020.

But will these forecasts be undermined by the signing of an agreement to supply 38 billion cubic metres (bcm) of natural gas a year from new pipelines linking Russia's Siberian fields to China's industrial heartland?

The new pipeline, which is supposed to start by 2018, will eventually ramp up to deliver the equivalent of about 27 million tonnes of LNG a year.

And even if Chinese demand can absorb both new pipeline supplies, rising domestic output and LNG, will the price of LNG have to fall to closer to that of other sources?

The answer to the demand question is that China appears determined to increase the use of natural gas in a bid to lower coal-fired pollution, and, if anything, is likely to consume as much of the cleaner fuel as it can produce or procure.

The National Development and Reform Commission (NDRC), China's top economic planning body, forecasts that natural gas supply will rise to 330 bcm by 2017 from just 174 bcm in 2013.

Much of the increase comes from pipelines, with Morgan Stanley research figures showing an increase to 65 bcm in 2017, from 25 bcm in 2013, while LNG imports are forecast to rise to 47 bcm from 28 bcm.

Domestic gas output is also expected to increase sharply, with conventional wells - which include "tight" gas - gaining to 165 bcm in 2017, from 118 bcm in 2013, and shale gas rising to 10 bcm from none.

The pipeline figures don't include the new deal with Russia, and are based on rising supply from central Asia, particularly Turkmenistan, which already supplies about 25 bcm to China a year, and this may reach 40 bcm by 2016 and 65 bcm by 2020.

The figures for domestic gas output may look optimistic, given it has risen only 6.2 percent to 42.1 bcm in the first four months of 2014, compared to the same period last year.

It also may take longer than anticipated for Russian gas to flow at the full 38 bcm, given the challenges and costs of building the pipeline.





CHANCE FOR LNG

This means there is still likely to be opportunities for LNG producers to sell into China, particularly in the industrialised southeast of the country, which is the furthest away from where the Russian and central Asian gas arrives.

China is building LNG receiving terminals at a rapid pace, with the current capacity of 31 million tonnes a year slated to rise to 80 million tonnes by 2018, when 15 new terminals being built or approved start operations.

If a further 13 terminals that are in the planning stages are eventually built, it would take China's import capacity to 110 million tonnes a year.

While import terminals rarely run at full capacity, it's worth noting that Japan, the world's top LNG buyer, shipped in 87 million tonnes of the super-chilled fuel last year.

Natural gas accounts for about 6 percent of China's energy consumption, and the government aims to raise that to at least 9 percent by 2017.

This potentially creates a virtuous circle for natural gas, with demand increasing as more infrastructure is put in place to distribute and consume the fuel.

For LNG developers the main risk isn't that Chinese demand won't be there, but that they will be squeezed out if their fuel is too expensive compared to pipeline supplies.



PRICE SQUEEZE

Terms of the just-signed deal between Russia and China weren't disclosed, although sources suggest it was in the region of $9-$10 per million British thermal units (mmBtu).

This would mean the Chinese are getting a better deal than Russia's European buyers, who pay about $10.60 per mmBtu.

It also means pipeline supplies would be priced lower than LNG, with China's average LNG import cost in April being $10.84 per mmBtu. This figure is kept lower than spot prices because of the cheap $3.22 per mmBtu China paid for Australian fuel under a long-term contract.

More realistic LNG pricing for China is the $18.49 per mmBtu paid to Qatar and the $18.55 paid to Angola in April.

Assuming $10 per mmBtu for the Russian deal, and another $3-$4 per mmBtu to transport it from the Chinese border to major cities, and LNG still looks uncompetitive.

This means LNG demand in China is likely to grow at a slower pace than that for pipeline and domestic supplies.

But it should also be borne in mind that the Chinese are keen to ensure diversity of supply, having no doubt learnt from the current European discomfort about their reliance on Russia in the midst of serious geo-political tensions over Moscow's role in unrest in Ukraine.

What the Russia-China deal does, though, is set a new benchmark for natural gas pricing in Asia.

And this new pricing structure has to be measured against the high cost of LNG export projects and the need to have firm sales agreements in place before construction proceeds.

If the Chinese insist on new LNG contracts closer in price to the pipeline supplies, it's unlikely that many of the planned LNG developments in Australia and elsewhere will go ahead. (Editing by Tom Hogue)
 
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Gas and oil pipelines from Russia and Central Asia will be far more reliable than that which is shipped from overseas.

That, together with our significant domestic reserves, should be enough to provide for our energy security in the medium term at least. :cheers:

But expect Chinese demand to boom even further in the coming years.
 
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LOL america is doomed they wasted all their money on LNG station for nothing

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Their shale gas extraction puts a lot of money into production vs conventional supplies from Russia. You can see above their are vastly more expensive than Russian gas in europe. And with China now setting at 9-10$ their are doomed to fail in asia too.

Of course some mainstream media post their propaganda how Russia will put their gas away from europe to asia but this is nonesense. Chinas gas will come from east siberia not from ural, thats what putin meant when he said: "it will be the biggest construction place in history" it will be a completely new architecture for the asian market. So Russias supply to europe will be unchanged.

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And if thats not enough Russia plans LNG projects too which extraction alone will be 10 times less expensive than america

How a small Russian Company will destroy Americas LNG Pipe Dreams, 54 cents vs 5 Dollars do the Math
 
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The US can consume much of its energy output, and will be supplying Europe for many years to come.

Unlike Russia, our economy doesn't rely so heavily on LNG.

It is interesting how much comes out of Russian media about how little the US energy resurgence matters. It is almost as if they are trying to convince themselves that is the case.
 
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The US can consume much of its energy output, and will be supplying Europe for many years to come.

Unlike Russia, our economy doesn't rely so heavily on LNG.

It is interesting how much comes out of Russian media about how little the US energy resurgence matters. It is almost as if they are trying to convince themselves that is the case.
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i didnt knew morgran stanley is russian media?

Russia doesnt have any LNG yet, only small station in shakalin island that transports some gas to japan.
 
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Unless LNG becomes as cheap as normal natural gas, it will remain a strictly niche market in China. We've used coal for so long because we are very price sensitive.

Americans and Australians will have to stake their future on Europe. Australia, I think is screwed though, because they're literally on the opposite side of the world from America, so transportation costs will be enormous.
 
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Australia is exporting laods of LNG and Natural Gas to China. Business is booming.
 
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