How the Russia-China Gas Deal Hurts U.S. Liquid Natural Gas Industry

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Russia and China finalized a truly massive gas deal during Russian President Vladimir Putin’s visit to Shanghai this week, and while the agreement is a bilateral one, its effects will be felt as far away as Texas and Louisiana.

The financial details remain murky – Gazprom CEO Aleksei Miller called them a “commercial secret” — but the total value of the contract is estimated at $400 billion. Russia agreed to deliver 38 billion cubic meters (bcm) of natural gas to China each year beginning in 2018, the equivalent of one-quarter of China’s current annual consumption.

The deal spans 30 years and solidifies what has often been a tense relationship between Moscow and Beijing. Russian media is calling it the “gas deal of the century.”

Even if Russia had to make large concessions to China on the final price, the deal gives it access to one of the world’s largest energy markets and diversifies its customer base away from a Europe looking for other suppliers. China, meanwhile, has gained a secure supply of natural gas for decades.

But the geopolitical ramifications don’t stop there. A deal of such a monumental size will undoubtedly ripple through energy markets. For example, China has long been seen as a massive consumer of liquefied natural gas (LNG) — gas that is turned to liquid form and transported by super-chilled container ships. The deal with Russia could curb quite a bit of that projected demand; the 38 bcm that will flow to China via pipelines will supply a tenth of China’s annual gas consumption by 2020.

This could dampen the demand — and ultimately the price for — LNG from the United States. East Asia represents the most prized market for producers of LNG. That’s because it is home to the top three importers of LNG in the world: Japan, South Korea and China. Together, the three countries account for more than half of LNG demand worldwide. As a result, prices for LNG are as much as four to five times higher in Asia compared to what natural gas is sold for in the United States.

The Russia-China deal may change that.

If LNG prices in Asia come down from their recent highs, the most expensive LNG projects may no longer be profitable. That could force out several of the U.S. LNG projects waiting for U.S. Department of Energy approval. As of April, the DOE had approved seven LNG terminals, but many more are waiting for permits.

LNG terminals in the United States will also not be the least expensive producers. The construction of several liquefaction facilities in Australia is way ahead of competitors in the U.S., and the country plans on nearly quadrupling its LNG capacity by 2017. More supplies and lower-than-expected demand from China could bring down prices over the next several years.

To be clear, there is still an opportunity for American LNG. China’s LNG appetite will still grow, and Japan – the world’s largest importer of LNG by far — is struggling to cut back on imported natural gas. The Japanese government suffered a big setback in its effort to restart its idle nuclear reactors when a court blocked the restart of a reactor near Tokyo, citing inadequate safety measures. The decision could ultimately spell greater delays for Prime Minister Shinzo Abe’s ambitious plans to bring back its nuclear fleet. Without a return to nuclear power, Japan will continue to rely on heightened imports of LNG.

Still, the natural gas deal between Russia and China, which had been at an impasse for a decade, could make the LNG market a bit less frothy than once thought. “All of a sudden, it’s going to be a very competitive gas market,” Trevor Sikorski, a consultant with Energy Aspects Ltd., told Bloomberg News.

Big proponents of LNG exports within the industry and halls of Congress have called for a more liberal export regime, arguing that LNG exports could have the dual benefits of undermining Russia’s energy machine and boosting the U.S. economy.

That ship may have sailed with the so-called “gas deal of the century.”

Originally written for OilPrice.com, a website that focuses on news and analysis on the topics of alternative energy, geopolitics, and oil and gas. OilPrice.com is written for an educated audience that includes investors, fund managers, resource bankers, traders, and energy market professionals around the world.

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