Today’s blockbuster deal belongs to China and Russia, who recently agreed on a 30-year contract worth an estimated $400 billion.
The contract will allow state-run Russian gas company OAO Gazprom to develop Siberian gas fields for export to China…
Well, it’s about time.
The two countries have been talking about this contract for more than a decade, but always lost traction during price negotiations. So with things starting to heat up between Russia and the Ukraine, it’s not surprising to see Gazprom lower its asking price a bit. Perhaps the threat of more sanctions is starting to hit home.
What we do know is that this deal significantly reduces Europe’s leverage against Russia, and places utilities in the Ukraine and the EU in an even more precarious position than before the deal was signed.
To put it bluntly, the EU will have to start looking somewhere else to meet its gas supply in the coming decades.
Of course, the U.S. is gradually opening up LNG export facilities, but that will take time.
Cyprus is having success drilling their proved reserves of nearly 6 trillion cubic feet, and are also in search of another 4 to 5 trillion cubic feet with new exploration projects.
Thing is, their gas exports to the rest of Europe would take years since they have yet to build up the necessary supply and infrastructure.
Europe’s best bet right now is the Bowland shale in northern England that reportedly contains 1,331 trillion cubic feet of natural gas. Granted, this prospect will also take a long time to develop, especially with the reluctance of the British government to pursue hydraulic fracturing and horizontal drilling.
Europe, however, won’t panic. They know it’ll take a long time to construct new pipelines, as well as develop Siberia’s sizable natural gas deposits.
But we know who the real winner is here: China. The Middle Kingdom will even shell out $25 billion in advanced payments to help move the process along. That makes perfect sense considering China will eventually gain roughly 38 billion cubic feet of gas per year when things are in full swing.
Recent data puts their electricity generation from natural gas at 3%, but the new deal with Russia will surely change that, not to mention the industrial capabilities of natural gas.
More importantly, the Chinese will finally be able to diversify a coal heavy grid that has caused unrest amid smog problems in cities and industrial areas.
Until next time,
Keith Kohl
