A massive natural gas agreement between Asian superpowers may have just pulled the proverbial rug out from under Canada’s hopes to become a major exporter of Liquefied Natural Gas. The deal underscores one of the risks of playing in the global energy game—the goal posts can suddenly move just when you’re ready to kick the ball.
In the LNG business, global trade flows are driven by prices or, more precisely, price differentials between where natural gas is produced and where it’s sold. British Columbia’s plans to become a big natural gas exporter hinge on the wide disparity between Asian and North American prices. In Asia at the moment, natural gas is selling for upwards of $15 per thousand cubic feet. On this side of the Pacific the cost is around $4.50 per mcf. Getting that gas from here to there is tricky, but it’s easy to see how much money there is to be made if you can pull it off.
Of course, the rest of the energy world isn’t exactly going to sit still while you get your plans together. Last decade, Quebec City found that out first hand when its plans to import LNG from Russia through a regasification terminal were scuttled after North American natural gas prices crashed. The emergence of shale gas drilling and the ensuing spike in production made those hopes obsolete. The same thing is about to happen to British Columbia’s ambitions to become a major player in the global LNG business. China, for one, has now found a much cheaper source of supply that’s right in its own backyard.
There’s no small irony to the fact that by exhorting their European allies to wean themselves off their dependence on Russian gas, President Obama and Prime Minister Harper may have quashed their domestic hopes of exporting LNG to China. In an unintended consequence of the turmoil in Ukraine, the resurgence of Cold War tensions has acted as a catalyst to cement one of the world’s largest-ever energy deals between Russia and China.
Russia’s reliance on western European markets is as strategically problematic for it as it is or for its customers. If a dispute compels Russia to turn off the gas the lights may go out in Kiev and Berlin, but it also means cash flows start to dry up in Moscow. Right now, Russia’s state run gas company, OAO Gazprom, counts on European countries for about 80 percent of its revenue. Reorienting its sales eastward is a natural hedge against any future conflict with western Europe that can imperil those vital cash flows. It’s also a natural fit. The world’s largest energy producer sits right next door to its biggest energy consuming economy.
The new $400-billion accord between Russia and China will also serve as a springboard for Gazprom to develop its vast and largely untapped natural gas reserves in eastern Siberia. Some 4,000 kilometres of new pipeline will hook up Siberian gas wells to Beijing and other parts of northeastern China, a region that holds the same population as all of western Europe. As part of the deal, Russia will supply 3.7 billion cubic feet of gas per day to China for the next three decades. First gas is expected to flow as early as 2018.
Just as the supply of shale gas brought down North American gas prices, so too will the new supply of Russian gas lower prices in China. It’s thought that Gazprom will get just under $10 per mcf for its gas exports to China, which is $3 to $4 less than current Asian LNG spot prices. What’s more, China also has its own supplies of shale gas just waiting to be developed. The International Energy Agency estimates those reserves to be among the largest in the world. Tapping those supplies will bring prices down even further.
There are at least a dozen proposals to export LNG from the B.C. coast. What will lower natural gas prices in China mean for those projects? Just ask Quebec City.