Gazprom sates China demand at US expense?

As Gazprom forms closer ties with China for the sale of its gas, Lianna Brinded asks whether the US could soon be forced to pay higher prices for its gas imports

China’s ever-increasing demand for gas imports is making the country an attractive customer for Russia’s Gazprom. This could be at the expense of the US, which might be forced to pay higher prices in the shorter term until its shale industry is up and running, say analysts.

In mid-February, Gazprom shipped 1 million tonnes of liquefied natural gas (LNG) to China, because the US gas market was economically unattractive, according to director general of OOO Gazprom Export, Alexander Medvedev.

“We have a terminal in California and two projects in the US at the moment, and also owned 1 million tonnes of LNG,” said Medvedev in a select press briefing on February 9. “We looked to market it in the US, but only with a favourable pricing environment. Because the environment for the Henry Hub was not favourable, we sold it in the Asia-Pacific, specifically China.”

While this highlights the low price of gas in the US relative to other areas, analysts are now asking whether this situation is sustainable. China’s juggernaut demand could pull up prices worldwide, helped by worldwide economic recovery.

“Investing in gas looks attractive longer term, irrespective of short-term volatility. Economic recovery is a recipe for higher prices over time,” says Kit Juckes, head of investment strategy at investment managers ECU Group.

Economists, such as David Page from Investec Securities, say that energy demand will continue to grow from China, as economic growth will be around 10% this year, while analysts point out that Russia is in a theoretical position to accommodate this demand.

“Security of supply for the Asians is a key criteria and one that Gazprom is capable of providing,” says Alex Metherell, head of Natural Resources at VTB Capital.

According to the Natural Gas Market Report for 2009 from the International Energy Agency (IEA): “Chinese gas use at near 80 billion cubic metres (bcm) in 2008 is the third highest amongst non-OECD countries. In order to promote the use of this “clean energy” as a substitute fuel for oil and coal, the Chinese government aims at expanding the share of natural gas up to 10% by 2020, and has enhanced the development of the domestic gas market.”

Gazprom, which produces 85% of Russia’s gas output, has been busy forging closer ties with Asia, most notably China, in a bid to widen its buyer base. It hopes to tackle increasing competition from the US LNG market, as well as addressing its desire to seek less dependence on European purchasers. At the end of 2009 it signed an agreement with China’s biggest state-owned petroleum company, China National Petroleum Corporation (CNPC).

Gazprom stated that they are to meet again to iron out “an understanding on other terms and conditions that would lay the foundation for entering into contracts on gas supply from Russia to China”.

The framework deal is to supply China with up to 80 billion cubic metres of gas a year for the next 10 years.

By decreasing its dependence on the US, Gazprom is also preparing itself for the onslaught of the US gas shale market, which could turn things around completely and result in a surplus of gas, say analysts.

According to the Natural Gas Market Report for 2009 from the IEA: “the unexpected boom in North American unconventional gas production, together with the depressive impact of the recession on demand, is expected to contribute to an acute glut of gas supply in the next few years”.

The IEA said 2008 was marked by large regasification capacity expansions but saw little growth in LNG output due to many production problems.

Regasification capacity is set to grow as the IEA declared that that the 2009–2013 period will see liquefaction capacity increase marketedly – from 280 bcm as of the end of 2008 to 373 bcm by the end of 2010 and 410 bcm by the end of 2013 – almost a 50% increase within five years.
Gazprom is certainly keen to continue ties with the US. Medvedev confirmed Gazprom is looking at more opportunities in the US, conducted through its subsidiary London office. He confirmed he and his Russia-based colleagues will be “dedicating a week in March” to discussing plans for the US.

In the meantime, China appears set to plug the gap on falling demand from the West, with its sharp rise in consumption over the past few years.