Energy Tribune

Russian Gas Finally Headed to China?

March 12, 2010

(This article was co-authored with Michael Economides and Xina Xie)

China and Russia have reached an initial agreement on pricing of natural gas from Russia. According to a recent statement by Zhang Guobao, the deputy director of China’s powerful National Reform and Development Commission, Russia will supply China about 2.5 trillion cubic feet (Tcf) of natural gas per year, starting in 2015. Although there was no mention of the actual price, Zhang said that the agreement “symbolized that the pricing negotiation had gone through the most difficult step.”

Before going further, let’s be clear: The Russians have been talking about supplying gas to the Chinese for years. In 2006, plans called for Russian exports of 2.1 to 2.8 Tcf of gas to China starting in 2011. But those imports have not materialized due to the economic crisis and the slow pace of pipeline construction.

China desperately needs more gas. The country derives just 4% of its primary energy from the fuel, while most developed countries get about 25% of their energy from natural gas.

Percent of Energy Derived from Natural Gas

Percent of Energy Derived from Natural Gas

Source: BP Statistical Review By Seth Myers

In 2008, according to BP, China’s gas use averaged about 7.8 billion cubic feet per day. Meanwhile, US consumption averaged 63.4 bcf/d. For another comparison, consider this: In 2008, Germany, a country of 82.1 million, used more gas (7.9 bcf/d) than did China, even though China’s population (1.3 billion) is nearly 16 times as large as Germany’s.

Obviously, China needs more gas production. But in 2007, China’s gas consumption exceeded its domestic gas production. To meet demand, China has been importing gas in ever-increasing quantities.

Chinese officials are well aware of the problem. Last October, they signed a deal to import gas from Russia. But that agreement was the fourteenth time top leaders from the two countries had signed gas-related agreements, but still, nothing concrete has been decided. At the October meeting, Gazprom and CNPC agreed that the pricing of natural gas would be indexed to Asian crude oil price and that the final gas price would be determined in 2014. Nor did they determine whether payments would be in rubles or yuan.

And there were opt-out options. “If the price Russians ask is too high next year, China may not import the gas, even if the pipeline is finished,” said Li Wei, a Chinese natural gas official.

Lower oil prices were an important factor in the recent favorable negotiations between Russia and China. In addition, the central Asia natural gas pipeline linking Turkmenistan with China’s Xinjiang Province began operating in December. President Hu Jintao was present for the pipeline inauguration, along with the presidents of Turkmenistan, Uzbekistan and Kazakhstan. The 1,801-kilometer pipeline traverses Uzbekistan and Kazakhstan. Most of the $6.7 billion construction fund was provided by China Development Bank.

Before the pipeline was built, central Asian countries had to sell all their natural gas to Russia, then Russia sold the gas through Russian pipelines to other countries. The new pipeline — Kazakhstan’s first that does not go through Russia — provides a way around Russia’s energy infrastructure dominance. The new pipeline links with China’s West-East gas pipeline and delivers gas to points as far away as Hong Kong.

And while the new pipeline is important, China still must deal with Russia, the biggest player in the Asian energy scene. And those dealings can be perilous. In its most recent of the world’s most corrupt countries, Transparency International found that Russia has dropped 5 notches over the past two years from #143 to #148 out of 180 countries. Russia now ranks below countries like Nigeria and Uganda and just above Zimbabwe.

China can, and will, meet more of its gas needs with LNG imports. In January, it imported 776,600 tons of LNG, a 282% increase over the quantities imported in January 2009. But even with all of that new LNG, which in January amounted to about 1.1 bcf/d, China still needs Russian gas. A lot of Russian gas.

Original file here: http://www.energytribune.com/articles.cfm?aid=3490