Rus­sia-China Gas Deal Sets New Global Price Bench­mark

IT’S PRICEYAt $10-11, it is more than the govt-no­ti­fied price of $8.4 per unit

The Economic Times - - Companies & Functional Design - HI­MANG­SHU WATTS IN­DIAN PER­SPEC­TIVE

Rus­sia’s move to sign a $400-bil­lion deal to sup­ply nat­u­ral gas to China for $10-11 per unit through a pipe­line sig­nals the coun­try’s strate­gic shift to­wards Asia af­ter Western hos­til­ity over the Ukraine cri­sis — a move that has raised the prospects of more hy­dro­car­bon deals with In­dia, apart from set­ting a new bench­mark for nat­u­ral gas prices. The deal was signed on Wed­nes­day, May 21. Western an­a­lysts say China, with sev­eral op­tions to buy gas, ne­go­ti­ated clev­erly with Rus­sia, which did not have many al­ter­na­tives, and brought the price down to about $10 per unit of gas, which is cheaper than the price in some mar­kets in western Europe and much cheaper than the price of $12-15 at which In­dia im­ports Liq­ue­fied Nat­u­ral Gas (LNG). It is, how­ever, higher than the ap­proved, but not im­ple­mented, price of about $8.4 for do­mes­tic nat­u­ral gas from all sources, in­clud­ing Re­liance In­dus­tries’ KG-D6 block and fields be­long­ing to Oil and Nat­u­ral Gas Corp (ONGC). For In­dia, the mega deal also jus­ti­fies the dou­ble-digit price at which the coun­try wants to buy gas from Turk­menistan which will be moved via an am­bi­tious transna­tional pipe­line across volatile re­gions of Afghanistan and Pak­istan. The Rus­sia-China deal also pro­vides a new per­spec­tive to do­mes­tic gas pric­ing, as the new for­mula makes In­dia sup­ply about 20% cheaper than the Asian bench­mark set by neigh­bour­ing China. An­a­lysts say most of In­dia’s yet-to-be-dis­cov­ered nat­u­ral gas is in deep to ul­tra-deep sea re­gions, which would be vi­able at about the price that China has ne­go­ti­ated with Rus­sia. The deal would also cap the in­ter­na­tional price of LNG as Rus­sia will be able to de­velop new gas fields to sup­ply China, thereby in­creas­ing the avail­abil­ity of global gas. Af­ter the 4,000-km pipe­line is built, gi­ant gas fields in east­ern Siberia would be BROUGHT THE price down to about $10 a unit, which is cheaper than the price in some mar­kets in Western Europe and much cheaper than the price of $12$15 at which In­dia im­ports LNG able to start pro­duc­ing gas as they will find an out­let and an as­sured mar­ket for three decades. Once the sup­ply be­gins in a few years, China, which has a vo­ra­cious ap­petite for en­ergy and has been a key driver of global en­ergy prices, would have more mus­cle to ne­go­ti­ate with LNG sup­pli­ers. Fitch Rat­ings said the deal “sets a new bench­mark for what China is will­ing to pay for nat­u­ral gas over longer-term con­tracts”, ac­cord­ing to a Reuters re­port. In­dia is also ex­pect­ing gains from Rus­sia’s strate­gic shift. An of­fi­cial del­e­ga­tion has al­ready vis­ited Rus­sia this month to as­sess the sit­u­a­tion and dis­cuss prospects of co­op­er­a­tion in the en­ergy sec­tor. ONGC has al­ready in­vested bil­lions in Rus­sia, in­clud­ing the Sakhalin project, which paid hand­some div­i­dends as well as in Im­pe­rial En­ergy, which turned out to be an em­bar­rass­ment. ONGC-owned Im­pe­rial En­ergy’s oil out­put fell be­low 10% of the 80,000 bpd pro­jected be­fore the $2.1-bil­lion ac­qui­si­tion. Gazprom, the world’s big­gest gas com­pany, is clearly ex­cited about its out­look. “Rus­sia and China have signed the big­gest con­tract in the en­tire his­tory of the USSR and Gazprom — over 1 tril­lion cu­bic me­ters of gas will be sup­plied dur­ing a whole con- IT IS, how­ever, higher than the ap­proved but not im­ple­mented price of about $8.4 for do­mes­tic nat­u­ral gas from all sources, in­clud­ing RIL’s KG-D6 block and fields be­long­ing to ONGC Pro­vides a new per­spec­tive to do­mes­tic gas pric­ing, as the new for­mula makes In­dian sup­ply about 20% cheaper than the Asian bench­mark set by neigh­bour­ing China Most of In­dia’s yet-to-be-dis­cov­ered nat­u­ral gas, in deep to ul­tra-deep sea re­gions, would be vi­able at about the price that China has ne­go­ti­ated with Rus­sia trac­tual pe­riod. Rus­sian gas will be sold at a brand new mar­ket with a huge po­ten­tial. The ar­range­ment of Rus­sian pipe­line gas sup­plies is the big­gest in­vest­ment project on a global scale. Fifty-five bil­lion dol­lars will be in­vested in the con­struc­tion of pro­duc­tion and trans­mis­sion fa­cil­i­ties in Rus­sia,” the com­pany said on its web­site.

Western an­a­lysts say Rus­sia’s fo­cus on China, and a likely in­ter­est in In­dia, which was an ally of the for­mer Soviet Union, could also spell trou­ble for Euro­pean coun­tries. An­a­lysts say coun­tries such as the UK may start run­ning out of nat­u­ral gas sup­plies in three years, and would then have to com­pete with China for sup­plies.

“Lit­er­ally, a day ago, a re­ally his­tor­i­cal event took place, an epoch-mak­ing event. We, Rus­sia and Gazprom, have dis­cov­ered the Asian gas mar­ket for our­selves,” Gazprom chief ex­ec­u­tive Alexei Miller said at the St Peters­burg In­ter­na­tional Eco­nomic Fo­rum, ac­cord­ing to an agency re­port.

“It can be as­sumed that the sign­ing of the con­tract will af­fect gas prices on the Euro­pean mar­ket,” he said with­out giv­ing any de­tails. He said the deal will also have an im­pact on LNG projects in east­ern Africa, Aus­tralia and western Canada.

The deal jus­ti­fies the dou­ble-digit price at which In­dia wants to buy gas from Turk­menistan which will be moved via an am­bi­tious transna­tional pipe­line across Afghanistan and Pak­istan

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