--Clyde Russell is a Reuters columnist. The views expressed
are his own.--
By Clyde Russell
LAUNCESTON, Australia, May 22 Should developers
of liquefied natural gas projects in Australia, the United
States and elsewhere be worried by the $400 billion deal between
Russia and China?
After all, China is the big hope for growth in LNG demand,
with some forecasts calling for a tripling of its imports to
more than 60 million tonnes per annum by 2020.
But will these forecasts be undermined by the signing of an
agreement to supply 38 billion cubic metres (bcm) of natural gas
a year from new pipelines linking Russia's Siberian fields to
China's industrial heartland?
The new pipeline, which is supposed to start by 2018, will
eventually ramp up to deliver the equivalent of about 27 million
tonnes of LNG a year.
And even if Chinese demand can absorb both new pipeline
supplies, rising domestic output and LNG, will the price of LNG
have to fall to closer to that of other sources?
The answer to the demand question is that China appears
determined to increase the use of natural gas in a bid to lower
coal-fired pollution, and, if anything, is likely to consume as
much of the cleaner fuel as it can produce or procure.
The National Development and Reform Commission (NDRC),
China's top economic planning body, forecasts that natural gas
supply will rise to 330 bcm by 2017 from just 174 bcm in 2013.
Much of the increase comes from pipelines, with Morgan
Stanley research figures showing an increase to 65 bcm in 2017,
from 25 bcm in 2013, while LNG imports are forecast to rise to
47 bcm from 28 bcm.
Domestic gas output is also expected to increase sharply,
with conventional wells - which include "tight" gas - gaining to
165 bcm in 2017, from 118 bcm in 2013, and shale gas rising to
10 bcm from none.
The pipeline figures don't include the new deal with Russia,
and are based on rising supply from central Asia, particularly
Turkmenistan, which already supplies about 25 bcm to China a
year, and this may reach 40 bcm by 2016 and 65 bcm by 2020.
The figures for domestic gas output may look optimistic,
given it has risen only 6.2 percent to 42.1 bcm in the first
four months of 2014, compared to the same period last year.
It also may take longer than anticipated for Russian gas to
flow at the full 38 bcm, given the challenges and costs of
building the pipeline.
CHANCE FOR LNG
This means there is still likely to be opportunities for LNG
producers to sell into China, particularly in the industrialised
southeast of the country, which is the furthest away from where
the Russian and central Asian gas arrives.
China is building LNG receiving terminals at a rapid pace,
with the current capacity of 31 million tonnes a year slated to
rise to 80 million tonnes by 2018, when 15 new terminals being
built or approved start operations.
If a further 13 terminals that are in the planning stages
are eventually built, it would take China's import capacity to
110 million tonnes a year.
While import terminals rarely run at full capacity, it's
worth noting that Japan, the world's top LNG buyer, shipped in
87 million tonnes of the super-chilled fuel last year.
Natural gas accounts for about 6 percent of China's energy
consumption, and the government aims to raise that to at least 9
percent by 2017.
This potentially creates a virtuous circle for natural gas,
with demand increasing as more infrastructure is put in place to
distribute and consume the fuel.
For LNG developers the main risk isn't that Chinese demand
won't be there, but that they will be squeezed out if their fuel
is too expensive compared to pipeline supplies.
Terms of the just-signed deal between Russia and China
weren't disclosed, although sources suggest it was in the region
of $9-$10 per million British thermal units (mmBtu).
This would mean the Chinese are getting a better deal than
Russia's European buyers, who pay about $10.60 per mmBtu.
It also means pipeline supplies would be priced lower than
LNG, with China's average LNG import cost in April being $10.84
per mmBtu. This figure is kept lower than spot prices because of
the cheap $3.22 per mmBtu China paid for Australian fuel under a
More realistic LNG pricing for China is the $18.49 per mmBtu
paid to Qatar and the $18.55 paid to Angola in April.
Assuming $10 per mmBtu for the Russian deal, and another
$3-$4 per mmBtu to transport it from the Chinese border to major
cities, and LNG still looks uncompetitive.
This means LNG demand in China is likely to grow at a slower
pace than that for pipeline and domestic supplies.
But it should also be borne in mind that the Chinese are
keen to ensure diversity of supply, having no doubt learnt from
the current European discomfort about their reliance on Russia
in the midst of serious geo-political tensions over Moscow's
role in unrest in Ukraine.
What the Russia-China deal does, though, is set a new
benchmark for natural gas pricing in Asia.
And this new pricing structure has to be measured against
the high cost of LNG export projects and the need to have firm
sales agreements in place before construction proceeds.
If the Chinese insist on new LNG contracts closer in price
to the pipeline supplies, it's unlikely that many of the planned
LNG developments in Australia and elsewhere will go ahead.
(Editing by Tom Hogue)