China and Russia’s US$400-billion natural gas deal ‘complicates’ new LNG projects – by Yadullah Hussain (National Post – May 22, 2014)

The National Post is Canada’s second largest national paper.

Russia’s US$400-billion natural gas deal strengthens Vladimir Putin’s hand and gives China greater leverage to secure better pricing deals with Canadian and other exporters looking to capture a slice of the Asian market.

“This is the biggest contract in the history of the gas sector of the former USSR,” said Mr.Putin, after state-controlled Gazprom signed a deal with China National Petroleum Corp (CNPC) Wednesday.

The deal, a decade in the making, is a coup for Mr. Putin who is keen to demonstrate his ability to find alternative markets as his primary energy customers in Europe are seeking new supply sources in the aftermath of the showdown in Ukraine.

The deal also gives Russia a strategic market share in the world’s fastest growing major natural gas market. The International Energy Agency expects China’s natural gas demand to rise 6% per year through 2035.

While details of the deal were not disclosed, analysts believe Russia secured the 30-year deal to supply 38 billion cubic metres of natural gas per annum via pipeline at US$10 per million cubic feet, compared to the US$14-US$15 per mcf for Asian gas imports. Russia intends to invest US$55-billion to develop the project with the Chinese footing an additional US$22-billion.

“The deal removes a part of the demand that would have been met by LNG,” said Peter Howard, president of the Canadian Energy Research Institute. “It makes the game a little more congested with regard to LNG projects in Western Canada, Western United States, Gulf of Mexico, Australia and Mozambique — it is going to make it a little more complicated.”

The China-Russia agreement may also simply “knock out” some of the marginal projects, Mr. Howard said, noting that Japan, South Korea remain major importers of natural gas.

Indeed, natural gas demand is rising at a fast clip across key Asian markets with Canada, Russia and Australia among two dozens countries jostling to capture a slice of the natural gas-guzzling region.

Most project proponents have struggled find a sweetspot price for LNG amid pressure from Asian buyers who are reluctant to pay US$15-US$18 per million British thermal units, compared to US$8-US$10 per mBTU paid by their counterparts in Europe.

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