After a decade long deliberation, Russian natural gas giant
Gazprom and China National Petroleum Corporation have finally
signed a natural gas supply agreement. Per the agreement, Gazprom
will supply 38 billion cubic meters of natural gas to China
annually from 2018 for the next three decades. The supply volume
may increase to as much as 61 billion cubic meters annually.
Value of the Deal
The historic deal is expected to be valued at $400 billion. The
Russian officials were tight lipped about the value of the
at which the deal was finalized, but confirmed that the pricing was
made at market rates.
What Expedited the Deal?
Well, one can only muse why a deal that took 10 years in the making
was signed overnight in the wee hours of the morning in Shanghai.
It appears that the threat of imposing stricter sanctions on Russia
following its misadventure in Ukraine from the western world must
have led Russian top officials to seal the natural gas supply deal
with neighboring China. The increasing possibility that the EU will
spurn gas imports from Russia (EU imported 160 billion cubic meters
of gas in 2013) must have been a lurking fear for Russia to seek a
China for its part has shown phenomenal growth. Though fears of a
slowing Chinese economy have stalked the markets lately, the
proposed introduction of capital market reforms from the government
might act as a catalyst going forward. It goes without saying that
industrial growth is powered by the energy sector and China needs
more gas for running its factories. This bilateral trade relation
between China and Russia is also an important symbolic step.
We also believe that the shale gas boom in the U.S. and the gradual
permissions given by the U.S. Department of Energy to export
natural gas have also prompted the Russia-China natural gas supply
China Drives a Hard Bargain
Undoubtedly, China will need more energy to sustain industrial
growth. China utilized 170 billion cubic meters of natural gas in
2013 and this will increase going forward. So, finding a reliable
supplier of natural gas at a favorable price was a top priority for
China. It seems Gazprom has offered China gas at a lower price than
what they charge the EU for gas exports.
Natural gas export contributes a major chunk of Russian export
revenues. Sanctions against Russia due to mounting tensions with
the West regarding Ukraine and other issues must have driven it to
find another gas market. China made the most of the situation,
driving a hard bargain.
Will the Deal Impact U.S. Operators?
The deal is sure to strengthen ties between Russia and China. But
the important question is whether it will affect the prospects of
the U.S. operators. It is time to check some ground realities and
ascertain the extent of demand for energy in China. Per a report
from the U.S. Energy Information Administration (EIA), the total
energy usage in China will increase to 219.9 quadrillion Btu in
2040 from 115.5 quadrillion Btu in 2012.
Per the deal, the supply of natural gas will begin only from 2018
and the volume supplied will by merely 1/5th of the total volume
consumed by China in 2013. So, there will be enough room for other
natural gas operators to supply gas to the country.
Moreover, going forward, natural gas usage will not be sufficient
to meet the increasing Chinese demand for energy. China will
willy-nilly have to depend on coal and other alternate energy
resources. Here the U.S. companies like coal supplier
Peabody Energy Inc.
) and solar module maker
First Solar, Inc.
) will come into play among others.
Finally, if the E.U. decides not to import natural gas from Russia,
new opportunities will open up for U.S. operators like
Noble Energy, Inc.
) which has a presence in the Leviathan Basin in offshore Israel
Anadarko Petroleum Corporation
) with a strong presence in Africa.
U.S. Heading Towards Gas Exports
A current report from the U.S. Energy Information Administration
(EIA) suggests that the shale boom will actually result in 1.6%
annual growth of natural gas production in the U.S. from 2012
through 2040. As a result, after meeting domestic demand, the U.S.
will become a net exporter of natural gas by 2020. So, from a net
importer of 1.5 trillion cubic feet ("Tcf") of natural gas in 2012,
the U.S. will likely be a net exporter of 5.8 Tcf in 2040.
To Sum Up
This deal appears to be a desperate move by Russia to secure an
alternative gas market. That said, it is not going to impact the
natural gas exports of U.S. operators. China here will continue to
be an important market - the shale boom in onshore U.S. will find
markets in China and other developing nations in urgent need for
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