On Wednesday, China and Russia signed a 30-year natural gas deal that’s worth an estimated $400 billion. Starting in 2018, Russia is to export up to 1.4 trillion cubic feet of natural gas a year to China, equal to more than 15 percent of China’s current demand.
China would become Russia’s second-largest market for natural gas, after Germany. The deal, which came after about 15 years of talks, calls for at least $75 billion in spending on pipelines and other infrastructure on both sides of the Russia-China border.
The agreement seems to be a win-win. It enables Russia to both significantly boost gas exports and diversify away from Europe. The two fields expected to provide most of the gas to China are in Russia’s East Siberia region. Without China as a customer, the fields likely wouldn’t be developed. The deal also strengthens Russia’s hand amid the threat of European sanctions over Russia’s incursion into Ukraine, even though Russia is Europe’s largest single gas supplier.
For China, this is yet another way to meet its steadily rising demand for energy at what is likely an attractive price, while easing some of its dependence on unstable sources.
China’s agreement with Russia is just the latest in a long line of actions taken in recent years to secure new energy sources. China is willing to use a variety of methods to meet that goal. China now has operations, investments or projects all over the rest of the world, including Africa, the Middle East, Africa, North America and South America.
For example, China is Iraq’s biggest oil customer and a major investor in its oil fields. Yet China otherwise maintains a very low profile there. In contrast, China is actively involved with Venezuela and Ecuador, both with anti-U.S. governments. China also has significant properties in Africa.
In early May, China brought a huge, $1 bi! llion deepwater drilling rig to waters in the South China Sea that have long been the subject of a dispute with Vietnam. This happened only six months after the two countries announced that they would seek ways to jointly develop oil and gas fields.
Also along for the ride was a Chinese flotilla of support vessels, including several naval warships. Increasing tensions subsequently included ships from both countries ramming each other and the Chinese naval forces using water cannons against the Vietnamese.
In 2000, China used only half as much energy as the U.S. In 2009, it became the world's biggest energy user. It consumed 10.1 million barrels of oil per day last year, one-ninth of the world's total. Now China also is the foremost oil importer, and it now burns as much coal as the rest of the world combined.
Indeed, global energy demand, primarily from other emerging markets as well as China, continues to rise. Another source of potentially increasing energy demand is India, the world’s second most populous nation, not far behind China, but currently just the 10th largest economy.
Last week, voters in India ousted the long-dominant Congress Party from power. The winner in a landslide was the Bharatiya Janata Party (BJP). The BJP’s Narendra Modi, the nation's first Hindu nationalist prime minister, campaigned on a promise to revive India's economic growth. With a majority in parliament, he's expected to enact numerous pro-growth policies. Of course, the growth will take a while to develop. But growth inevitably increases demand for energy, particularly oil.
Meanwhile, many major oil-producing nations face various production constraints. Examples: Iran, Libya, Mexico, Nigeria and Venezuela. The U.S. is a dramatic exception: We’re responsible for more than half of the world’s total oil-production increase over the last five years. But we don’t export our crude oil, at least not yet.
The price China is paying for Russia’! ;s gas wa! s not disclosed. The agreement is said to include a pricing formula linked to crude oil. But some reports suggest that the new China-Russia agreement really only specifies the amounts of gas to be shipped, so that construction of the pipeline could begin.
Shortly before the deal was officially announced, it was reported that the two nations had failed to agree on price. But if Putin had left China without the expected agreement, his negotiating position with Europe would have been significantly weakened. Then the agreement was signed, with or without a specific price. According to some analysts, the implied terms will give China a steady supply of Russian gas at 25-40 percent less than the current cost of importing liquefied natural gas (LNG) from overseas.
The China-Russia agreement seems to offer good news and bad news for the global LNG market. The good news is that it suggests strong global demand for LNG.
The possible bad news is the future impact on global LNG prices, and therefore the viability of the many LNG export plants planned in the US, Canada and elsewhere to ship cheap natural gas to foreign markets, including Asia. There's a huge spread between the low prices of North American natural gas and the high-priced LNG that's shipped to Asia.
With ongoing global energy-demand increases, supply constraints and possibilities for production disruptions, China’s energy ambitions likely will have significant political, economic and other implications for the rest of us.
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