June 13, 2014
On May 21, 2014 China signed the largest natural gas deal in history, agreeing to purchase an estimated $400 billion in natural gas from Russia. The 30-year deal not only provides Beijing with a new source of clean energy but also forges a new strategic relationship with Russia, which is currently facing international sanctions for its recent actions in the Ukraine.
As a result of this deal, Russia will now build natural gas fields in-country and run pipelines directly to China. Russia will be responsible for all construction within its borders and China will manage construction within its borders. By 2018, Russia will be supplying China with about 38 billion cubic meters of natural gas a year.
By forming a new economic relationship with China, Russia can reduce its dependence on European customers, which shifts Russia’s relationship with Europe entirely, and this deal comes at a time when Russia’s relationship with the West is at an all time low.
The potential impact of the natural gas deal on Asia could permanently change the global energy landscape. As Russia unlocks new natural gas supplies and contains Liquefied Natural Gas (LNG) costs, China as well as other countries in the region-Japan, South Korea, and Taiwan-will gain energy security. And as a result, natural gas prices will significantly decrease across Asia. As in particular stands to benefit Japan, as the country not only buys about a third of the world’s LNG shipments but its utilities pay the highest prices in the world.
A new pipeline could not only provide new gas sources for LNG buyers in Asia but also set new price standards throughout the region. According to Masumi Kimura, a researcher at Japan Oil, Gas and Metals National Corp (JOGMEC) who was recently quoted by Reuters, “This will surely put downward pressure on gas prices and some say it is the beginning of the end of the Asia premium.”
Founder & CEO, Tiger-Consulting