Russia and China agreed to a second gas deal this month. This time, it is for the same supplies that flow towards Europe.
Together with the decline in natural gas production in the North Sea, a potential loss of Russian gas volumes could cause a one third drop in current EU supplies.
Russia’s shift towards the East will shift the main LNG market to Europe, which is not economically as prepared to deal with the higher prices, hurting Europe and LNG exporters.
Only a few months ago, we witnessed a huge $400 billion gas deal signed between Russia and China. Western media largely greeted the deal with some partisan dishonesty, falsely claiming that Russia was taken advantage of by China, despite the fact that most indications are that China agreed to pay a similar price of around $360 per 1,000 cm as the EU currently does, with the price fluctuating in tandem with oil prices. Now we have news about another deal that I warned about in an article in September, which has the potential to pit the EU against China for the same Western Siberian gas supplies. Back then it was just talk about a deal in November with unspecified details, while now we are presented with the reality of a deal having been agreed to for 30 billion cubic meters per year in addition to the 38 billion cubic meters agreed to in the previous deal.
It is news that very few people paid attention to, despite the dramatic long-term effects this will have on Europe’s already struggling economy. Even as the deal was made public, there has been very little reaction. Very few people in Europe are jumping to launch a public debate about its ramifications. It is as if it does not matter, even though it matters greatly.
The main ramification of this is that Russian gas will no longer be the price setter in the EU. More expensive LNG will be the new price floor, because the EU will not be able to do without it, just as it currently has no way of doing without Russian gas. This means that the EU, which already pays on average more than double that Americans pay for natural gas, are facing an increase from around $350/1,000 cm to a price in the $450-500 range, which is what countries like Japan are willing to pay. The EU already has the installed capacity to import about 200 billion cubic meters of LNG, which is more than the roughly 160 billion cubic meters of gas it currently imports from Russia. It does not import that LNG because it has such an uncompetitive price. Only about 20% of the capacity is put to use.