China's Gas Deal with Russia Could Benefit Rest of Asia

By SIMON HALL

Vast Siberia Fields Expected to Produce Enough Cheap Fuel for Other Countries, Put Pressure on Other Development Projects

Russia's $400 billion gas deal with China may pave the way for cheaper energy for the rest of Asia and put in question the viability of future gas developments around the world.

By committing to the 30-year accord, Beijing will help finance the development of two vast gas fields in Eastern Siberia. While much of that output will go to China, there will still be plenty of relatively cheap gas left over that Russia plans to pipe to the Pacific coast near Vladivostok and ship as liquefied natural gas to elsewhere in Asia.

That will put downward pressure on energy prices in the region and avoid Russia becoming too reliant on China. Russia made a similar maneuver several years back when it built a crude-oil pipeline to the Pacific with a spur pipeline into China.

While good news for buyers, lower prices are a potential threat for developers of other multibillion-dollar gas projects being planned that also target Asian markets, which need to decide soon if this new supply could lose them customers and impact their profits.

The significance so far of the deal is mostly political given the boost it provides to Russian President Vladimir Putin as his relations with the West sour. It remains to be seen what the deal will do to prices, but that will be crucial in determining the impact on other suppliers, many of whom are already experiencing cost overruns.

The agreement "will have profound impacts on multiple fronts including political relationships among China, Russia, Europe and the U.S., domestic gas market in China, and [the] LNG market in Asia," said analysts at Bernstein Research in Hong Kong. Higher-cost LNG projects "will be less likely to be developed."

Developing sites capable of producing gas can costs tens of billions of dollars and take years to bring online, leaving their backers vulnerable to sudden changes in the market, like the recent China-Russia deal or the unlocking of shale gas reserves in North America.

Some in Australia have already been hit by big cost overruns, including projects backed by Chevron Corp. CVX -0.25% , ConocoPhillips, COP +0.06% Total SA FP.FR -0.15% and BG Group PLC. Others like those planned offshore Mozambique by Anadarko Petroleum Corp. APC +1.04% and Italy's Eni ENI.MI 0.00% SpA are awaiting a final go-ahead.

While the Russia deal and development of China's own shale reserves and offshore gas deposits may put some projects at risk, producers say things aren't that bad.

Peter Coleman, chief executive of Woodside Petroleum Ltd., Australia's biggest exporter of natural gas by volume, said Thursday that despite the Russia agreement, China will still need a lot of gas from various supply sources. "China's growth is coming off such a small base at the moment," he said. "It's got a lot of headroom in it."

The Russian gas isn't expected to reach China for at least four years, and by the end of the decade will amount to around 10% of China's supply.

Others say China will also still need to have a variety of energy importers given the sometimes tense relations between countries that can lead to trade disruptions.

Another potential major source of gas to China and Asia is Canada, where more than a dozen LNG export projects are planned. State-owned Chinese companies are heavily invested in some of the larger ones, including the Kitimat venture and one spearheaded by Malaysia's Petronas.

"I don't think there's a country in the world that today wants to depend on Russia as their sole supplier of natural gas," said Christy Clark, premier of Canada's gas-rich British Columbia province. "Providing the assurance that we are not going to play politics with energy—I think that's worth a lot to our potential partners out there, I think especially China."

Just how much China will pay Russia isn't clear, but Barclays BARC.LN +0.74% analysts say it could be around $350 per million standard cubic meters, making it slightly cheaper for Chinese consumers than imported gas from the existing Turkmenistan-China Central Asia pipeline, but more significantly, around 40% below the cost of LNG brought in by sea.

Asia's LNG spot price is currently around $13.7 per million metric British thermal units, compared with a U.S. Henry Hub price of $4.5 per mmBtu and $7.7 per mmBtu in the U.K.

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