February 4, 2011
The general background to the discussion of supplying Russian energy to China was dominated by the basic human inability to project its own behavior and consumption patterns years, much less decades, from now. The debate, which focused almost solely on gas, was punctuated by some lively disagreements between the broadly cautious panel and representatives from Gazprom and NOVATEK, who hold a more optimistic view on China’s market potential.
Government policy, even more so than Chinese economic growth, is the key to deciphering the fortune cookie, the panelists agreed. For instance, how much will the environment be taken into account by governments around the world when deciding on their targeted energy mix? How important is energy security? Fatih Birol said that governments are important, but one government is more important than almost all the others combined – China’s.
Christof Ruehl of BP noted that China’s leadership will do whatever it can to limit oil imports, in order to reduce the risk of supply. This would leave more space for natural gas: the head of Gazprom Export’s LNG directorate, Marina Surzhenko, noted that the Chinese government’s own projections see 400 bcm of consumption as early as 2020. However, China will try to fill most of this from its own resources, noted Michael Stoppard of IHS CERA. He believes that we may be underestimating China’s ability to supply itself. Tim Lambert cited Wood Mackenzie estimates that China could produce some 270 bcm by 2030, or 60% of the most optimistic demand scenario, but even that may not be taking into account the huge potential growth in proven reserves in the country, which have already quadrupled over the past decade, Stoppard said.
So how will we know who is right and who is not? The number that will capture the varying disagreements into one neat consensus will be the price of deliveries, said Ruehl. He mentioned, for instance, that markets that are not liberalized, such as China, will continue paying under the oil-linked formula because there will be no competitive pressure on the local monopolist to push for lower prices. Indeed, Gazprom’s Surzhenko said that it is the volume that Gazprom and China are busy negotiating before their self-imposed July deadline. “Maybe we should not be relaxed and should hurry up” capturing a share of the Chinese demand, she underscored. However, Tatiana Mitrova of the Russian Academy of Sciences countered that while the size of the market remains hard to gage, Gazprom has time to wait and see. The gas heading to China will be more expensive for Russia to produce and transport than gas to the European markets, Mitrova said. Indeed, the pipeline from Turkmenistan to China, which many view as having dashed Gazprom’s expansionist hopes in Asia, has actually served to preserve the more lucrative European market share for Gazprom, she noted.
NOVATEK’s Mark Gyetvay brought up the same point he made in last year’s panel on Russian gas exports: companies cannot afford to base their investment decisions on the forecasts of think tanks that so often prove to be wide of the mark. This does not mean taking a pure leap of faith. Gyetvay pointed out that NOVATEK delivered a test shipment of gas condensate to China last autumn, “which shows that if you exercise some ingenuity, the market will open up to you.” Russia’s advantages as a lower-cost gas producer outweigh the higher transport costs it faces vis-a-vis competitors such as Qatar or Australia. However, Stoppard pointed out that in the two years since the crisis, final investment decisions to proceed with some 40 bcm of extra capacity have been made in Australia alone, which, added to indigenous ramp-up in China’s reserves, presents a clear challenge for Russian producers.
Peter O’Brien, Rosneft’s vice president, gave an optimistic note at the end. When Rosneft negotiated the export of some 300 kbpd to China over 20 years, both the producer and the pipeline export monopolist Transneft received purchase commitments and cheap credit. Were Gazprom to meet with similar success in its talks, it could trigger a paradigm shift in how investors value Gazprom’s reserves, O’Brien said.