Taming the Chinese Dragon & Asian Butterfly: Can Russia Compete in Asian Gas Markets?
Not only has Russian President Vladimir Putin showed his true political colors in recent years after befriending and apparently hoodwinking an unsuspecting George W. Bush during Bush’s first term in office, when Russia needed American aid, but his obvious stratagems to return Russia to former pre-Soviet collapse glory, and anti-American zeal, is playing out in the UN and around the world. But his ambitions are largely based on petro-dollars and the last thing Putin could have wanted was the recent and unfolding unconventional oil and shale gas revolution in the US.
Likewise, when news broke last year that China was also sitting on untapped reserves of unconventional shale gas deposits, as Europe’s demand for Russian gas was dwindling amid the EU’s fiscal debacle, Putin could be forgiven for reaching for a bottle of antacids. After all, anywhere between 30%-50% of the Kremlin’s budget is derived from Russia’s oil and gas exports.
However, an even more difficult problem has been Russia’s relations with China, both historically and on the energy front. The two have a checkered history of trying to forge mutually beneficial natural gas pipeline deals which have repeatedly stalled over price and route.
However, the chill appeared to warm in June when Russian state-oil firm Rosneft agreed on long-term contracts to supply more than 2.6 billion barrels of crude oil to CNPC over the next 25 years, while CNPC also agreed to buy a 20% stake in Novatek’s Yamal liquefied natural gas (LNG) project, the first time a Chinese company will participate in a Russian gas export project.
While some analysts claimed that this was a turn in Sino-Russian gas relations, Dr. Keun-Wook Paik, a Senior Research Fellow at the Oxford Institute for Energy Studies in London and author of “Sino-Russian Oil and Gas Co-operation: The Reality and Implications” told Energy Tribune that instead of blessing a Sino-Russian pipeline gas deal, China opted to accept a relatively small volume (3.5 mt/y) of Yamal LNG first, based on the 20% equity stake investment.
Paik said that Russia wanted to play the part of swing supplier by prioritizing the Altai gas export to China first, but “Russia’s shrewd scheme of diverting the contracted volume from Europe to Asia was rejected by China.”
“As there is no existing infrastructure that would allow Russia to divert its export volume from west Siberia to China and Asia, Russia’s only chance to penetrate the Asian gas market lies in LNG export. This is the reason why Russia is accelerating both Yamal and Vladivostok LNG scheme,” Paik said.
“Until a pipeline gas price deal is made, however, it cannot represent a new era for Sino-Russian gas cooperation,” he added.
Not only does Russia want to penetrate China’s growing natural gas market, but also wants to supply the rest of Asia also. In fact, in June Putin said that Russia has every chance of securing a place in the Asian natural gas market even while competition is on the rise.
“We are thinking about entering the promising market in the Asia-Pacific region,” Putin said. “We should find our niche there. We have every chance of doing that.” He also said that there is room for Russia on the Asian market despite LNG shipments from the Middle East and new supplies from Australia.
Putin’s statements signify a strategic shift that is unfolding for Russia’s natural gas ambitions amid declining gas demand Europe, Russia’s main gas consumer. In 2010 Eastern Europe made up 31% of Russian gas exports, followed by Germany at 27%, Turkey (14%), Italy (10%), France (8%) and other Western European countries at 10%, according to the U.S. Energy Information Agency (EIA). Russia holds the world’s largest natural gas reserves at 1,680 trillion cubic feet (tcf) and is the second largest natural gas producer after the US.
Consequently, Russia has little choice but to shift its gas focus to Asia. However, that may not be as easy as it sounds. Paik said that Russia’s strategy is to enter Asia’s gas market through LNG export first, rather than both pipeline gas and LNG export simultaneously.
“Even though another memorandum of understanding (MOU) for the Vladivostok LNG project was signed between Gazprom and Japan Far East Gas Co. Ltd during the June 2013 St. Petersburg Investment Forum, the chance of Vladivostok LNG’s penetration of the Asian gas market is not so high,” Paik said.
Under the Vladivostok project a LNG plant with an annual capacity of no less than 15 metric tons (mt) will be constructed near Vladivostok (Primorye Territory) Russia, the Vladivostok website states. The first train, with an annual capacity of 5 mt, will be commissioned in 2018. The project’s goal is to boost Russian gas supplies to Asia-Pacific markets
Paik also pointed to the fact that both Japan and South Korea (the largest and second largest global LNG importers) are aggressively pursuing U.S. shale gas based LNG supply, with target volume at 15-20 mt/y and 8 mt/y respectively.
Notwithstanding, American LNG will make it difficult for Russia to match prices in Asia. Paik said the price of Vladivostok LNG is set to be definitely higher than that of U.S. shale gas LNG, if the Henry Hub price of $3.5-4.0/mmbtu is applied for the export scheme.
Paik added that this is a “big headache” for Russia’s LNG export scheme. He cited East African LNG supply as another threat for Russia, in particular Mozambique whose proven reserves alone are over 5,000 billion cubic meters (bcm).
However, Russia is pressing ahead with its Asia gas ambitions. In a statement on Wednesday, August 21, Rosneft said they and Exxon Mobil began selecting contractors for design and engineering work on their planned gas liquefaction facility in Russia’s Far East, while project design work will be completed in 2013 and 2014 and earmarked for the Asian market from 2019.
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