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
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