Russia-China Gas Deal Won’t Impact Global LNG Development

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Russian President Vladimir Putin managed to save face and get a long-term gas supply deal signed before he left China earlier this week, and the Russian media trumpeted the $400 billion, 30-year deal as a triumph for Russia. Analysts, however, point out that relatively few details about the deal have been released, including the exact pricing formula for the gas and just who is paying for what sections of the pipeline. A number of analysts have commented that while the Russia-China gas deal is certainly significant, it’s clearly being hyped for propaganda purposes and no gas will flow through the proposed pipeline for several years.

Research firm Sterne Agee issued an Industry Report on the Russia-China gas deal on Thursday, May 23rd, suggesting that the deal would have a negligible impact on ongoing global LNG development.

Global gas price differential makes LNG economically viable

Sterne Agee analysts Michael S. Dudas and Patrick Uotila crunch the numbers on the Russia-China gas deal to come up with a price of $9.90 per mmbtu. Gazprom OAO (MCX:GAZP) (OTCMKTS:OGZPY)’s average gas price to Europe in 2013 was around $10.65 per mmbtu during, U.S. Henry Hub gas spot price are currently close to $4.40 per mmbtu, and spot prices are around $7.7 per mmbtu in the UK right now.

Dudas and Uotila point out that the geographic disparity in oil prices by location still provides more than adequate economic incentive to build expensive LNG storage and shipping infrastructure.

Russia-China gas deal not really that “big”

The Sterne Agee analysts also highlight that the development of the gas fields in Siberia supply China have been at least partially assumed in supply forecasts by LNG facility investors and developers.

They also remind us that Asia consumes around 75% of global LNG and that demand for gas continues to grow rapidly. “This Russia/China agreement calls for 38 billion cubic meters of gas per year, or around 3.7 bcf/d, a fraction of the 115 bcf/d LNG growth forecast up to 2030. By the end of the decade, this agreement could cover only around 10% of China’s supply, assuming all goes forward as proposed.”

Most U.S. LNG deals and with Japan and South Korea

Furthermore, Dudas and Uotila point out that the large majority of U.S.-led LNG deals signed over the last few years have been with Japan and South korea and will not be impacted at all by the Russia-China deal.

The analysts end by noting the Russia-China gas deal could even lead to greater LNG demand. “We believe US Gulf Coast LNG developments remain well positioned to take up supply slack in Europe if Russian supply gets diverted to Asia.”

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