After signing a $400 billion gas deal earlier this year, Russia and China are already talking about another one. This time the gas will come from fields currently supplying the EU.
The LNG potential market will likely shift from Asia to Europe as a result of less Russian gas to the EU and more to Asia.
LNG producers will find it difficult to get the current price they fetch in Asia for their product from the economically fragile Europeans, leading to severe losses.
Throughout my coverage of the Ukraine crisis and the economic implications in the region, I often pointed out that one of the end results will be that Russia will one way or another end its reliance on Ukraine as a major transit route for its gas, probably by the end of this decade. The latest news in regards to Russia’s shift towards the East is that both Russia and China are converging on consensus for another gas pipeline in addition to the $400 billion deal they signed a few months back for an East Siberia pipeline with a capacity of 38 billion cubic meters per year (1.2 trillion cubic feet).
The project in question is something both Russia and China have been considering for many years now, but in previous years China’s position was one of dampened enthusiasm for it for various reasons. The proposed project will involve taking gas from West Siberian fields which also provide gas to the EU. The new pipeline to China originally was supposed to cross the border through a region which would have presented many technical challenges due to the rough terrain. The new proposed deal will have the pipeline pass through Mongolia, where the flat plain presents a path that is far easier. Gazprom’s (OTCPK:OGZPY) head is suggesting that a deal may be signed by November of this year and while originally the idea was to send 30 billion cubic meters per year, Gazprom is considering raising that capacity to as much as 60-100 billion cubic meters. For reference, about 80 billion cubic meters of gas flow through Ukraine each year, which contributes to 15% of total EU gas consumption.
China’s shale gas disappointment, main catalyst of recent deals
As the shale fracking boom took hold in the US, ever more optimistic estimates of global shale gas potential became trendy. Unnoticed by many has been the gradual scaling back of those initial euphoric claims, which were not supported by actual data, as drilling results started to come in. First, there was Poland, where initial estimates of shale gas reserves were cut back by 90%. Other places such as Hungary also disappointed. Even in the US, the Marcellus field was downgraded by the USGS from over 400 trillion cubic feet, which is what industry and the EIA assumed to be technically recoverable, to 84 trillion cubic feet. This year it was China’s turn as it had to cut by half its estimate of shale gas production volume by 2020 to 30 bcm per year. China was believed to hold the greatest shale gas reserves on earth.