Russia is the second-largest producer and the largest exporter of natural gas in the world. The country’s most important customers are in Europe where the bulk of its exports are consumed. The completion of the Power of Siberia pipeline, however, could be a pivotal moment for Moscow as it reduces its reliance on traditional customers in the West. Besides Russia’s relations with Europe, the completion of the pipeline could also affect the import of LNG into China and potentially the trade deal between Beijing and Washington.
Few countries are as important for the international gas market as China. The Asian country's economic development has made it the single most important market for exporters. China accounts for more than 40 percent of the growth in international gas demand.
The U.S., on the other hand, is the largest contributor to production in the world. The country will extract 92.10 billion cubic feet per day in 2019, which will be an all-time high. Therefore, increasing LNG exports would be one of the most obvious ways to reduce the negative trade deficit with China on which President Trump has put so much emphasis.
China last year produced 149 bcm of natural gas. The Asian giant is slated to increase its production and become the third-largest producer in the world by 2027. Beijing has set ambitious goals for its three state-controlled energy champions. By 2040 China aims to be producing 325 bcm of natural gas.
However, the Asian country’s demand is set to grow even faster. According to state-owned Sinopec, China’s natural gas demand should increase by 82 percent to 510 bcm in 2030 from 280 bcm in 2018. Both economic growth and Beijing’s coal-to-gas transition are accelerating the country’s gas demand growth.
Sufficient import capacity, therefore, is essential for China’s energy security. The country is already the world’s largest importer of natural gas when taking into account both pipelines and LNG. Although Beijing is well-connected to gas producing countries in Central Asia, LNG has proven to be vital to maintain a steady supply of energy. In 2022 China is projected to overtake Japan as the world’s largest importer of the supercooled fuel.
A game-changing pipeline
The completion of the Power of Siberia pipeline is the most important development for the Asian gas market in the short and medium-long term. The Russian and Chinese economies are very complementary with the former being a resources-rich country and the latter requiring large volumes of energy to power its development. Furthermore, strong political relations between Moscow and Beijing and a largely coinciding world view strengthen the pipeline's importance for both countries.
However, the official opening of the pipeline on December 2nd, couldn’t have come at a worse time. The U.S. and China have been locked in an escalating trade war. The signing of a ‘phase one’ trade deal would lower tensions between the world’s two largest and most important economies.
In Washington's case, the economy is slowing and an election year is looming. LNG is one of the few short-term options for reducing the trade deficit so that President Trump can maintain that his strategy vis-à-vis Beijing is working. It would also boost his reelection campaign. The Power of Siberia pipeline could become an impediment for a sustained Chinese commitment to import American LNG instead of cheaper Russian gas.
Currently, the U.S. produces 46 million tonnes of natural gas per year (mpta). Another 27 mpta is approved, financed, and being built. The Power of Siberia pipeline, owned and operated by Gazprom, is designed to transport 10 bcm annually during the first couple of years and reach a peak capacity of 38 bcm by 2025. This is the equivalent of almost 25 mtpa of LNG.
It means that in the short to medium-long term a significant part of China’s gas demand will be supplied by Gazprom. Siberian gas will most likely replace LNG in northeastern China. Several Chinese importers have already hinted that they are thinking of selling LNG cargoes on the spot market as they can buy cheaper piped gas.
However, the export of modest volumes of natural gas in the first couple of years of the pipeline’s lifetime will have a limited effect on the import of LNG. Therefore, China could commit to the import of more American LNG cargoes to cater to Washington’s demands. However, Beijing will tread carefully for any long-term commitment as it knows that it can import far cheaper gas from Russia instead.
Source: Oil Price