China gas demand will continue to soar to 2018

Russia-China gas supply deals could set tone of LNG markets for years

LNG suppliers will find a supply gap by 2018 for LNG imports if the deal is not concluded soon.
LNG suppliers will find a supply gap by 2018 for LNG imports if the deal is not concluded soon.

2011 could prove a critical year in the overall development of China’s long-term gas outlook and determine opportunities for LNG suppliers hoping to supply gas to China according to energy consultancy Wood Mackenzie. Progress made on any supply deals from both west and east Siberia into China could see LNG demand squeezed if agreements can be reached. Conversely, if an agreement with Russia is not finalised in the next two years, China will require an additional minimum 30 billion cubic metres (bcm) of gas, with LNG likely to play an increased role

Gavin Thompson, Director of China Gas Research for Wood Mackenzie says, “The total volume of pipeline gas proposed to China from Russia is 68 bcm via two separate pipelines, from 2015 at the very earliest. Delays in achieving a successful conclusion will lead to a substantial increase in LNG requirements by 2018 and one of the key factors to a successful conclusion will be a consensus on the eastern or western Siberian route.“

“Of the two routes, the eastern route appears to offer China the greatest benefits,” Thompson adds. “It offers a potentially lower delivery cost and is uniquely able to feed the growing seasonal import requirements of northeast China. The western route on the other hand potentially competes with and restricts imports from Central Asia and could hinder the development pace of future indigenous unconventional gas. However, in order for Chinese interests to prevail they will need to offer concessions to Russia, including some compromise on price.”

On the other hand, the western route offers Russia the most immediate strategic benefits. In addition to offering lower, upfront costs it also provides physical diversification of west Siberian gas from European markets. This will strengthen the case for long-term contracts to Europe and also reinforce oil-indexed pricing arrangements should China agree to an oil indexed pricing arrangement. Subject to demand growth in China, it could also limit access to the Chinese market for gas from Kazakhstan, Turkmenistan and Uzbekistan, thereby maintaining these states’ dependency on Russia.

Despite the different strategic benefits to China and Russia, an overall agreement will benefit both parties. Mr. Thompson explains, “For China, both routes provide significant additional volumes of gas at a juncture when the overall future impact of its unconventional resources on future indigenous supply is still unproven. Also, both routes offer benefits for Russia, providing supply diversification, whilst counteracting demand erosion in its key domestic European market, and the market collapse for LNG exports to North America.”

In summary, Thompson says, “Whatever outcome is reached in the negotiations, it will result in mutual benefits. However, LNG suppliers will find a supply gap by 2018 for substantial supply of additional LNG imports if the deal is not concluded in the next two years. This near-term timeframe is therefore crucial to China’s gas supply requirements and to LNG suppliers as it implies either growth of China’s LNG import demand or a narrowing window of opportunity.”



Most Popular

Digital Edition

Oil & Gas Middle East - September 2020

Subscribe Now