Post on 25-Dec-2015
China and Russia Gas Trade: Is There a Common Ground ?
Chi Zhang, Vladimir DrebentsovNew Delhi, November 21, 2008
Content
Introduction and summary of conclusions
Overview of market trends
Future gas demand and supply
Russia’s plans for developing gas supply in Eastern Siberia and the Far East
Central Asian gas, where will it go?
Pricing issues in China and Russia
Is there opportunity for Russian gas in China?
Introduction and summary of conclusions
Key issue: What will feed growing demand
China’s natural gas consumption growth stronger than expected, promoted by
− Rapid economic growth
− Cheap natural gas price
− Environmental concerns
− Government strategy for increasing gas penetration
− Major supply hike is required to meet expected demand growth:
− Indigenous
− Imports: LNG, pipeline gas
Difficult negotiations to bring stranded Russian gas to China via pipelines:
−Original plans: 68 bcma export to China by 2020
−West Siberia (2011), East Siberia (2016)
−Yet there is no agreement on price:
−Russia wants market price for its gas (LNG price or the price Europe pays)
−China considers that price non-competitive
•There is more progress in bringing Central Asian gas to China
Bilateral history: Long and protracted negotiations
Sticking questions
−Will China really have huge demand growth, as projected, and what price levels will support high growth?
−Given “market demand” and alternative import options, is Russian gas competitive?
China’s natural gas demand will remain price sensitive. Gas prices are regulated, and in many regions are lower for residential and commercial consumers than those actually paid for imported LNG.
If market prices are introduced, gas consumption, particularly by power generators, will depend on policy support (subsidy)
The main risk is that the actual gap between domestic demand and supply may be much smaller than currently assumed, if government allows market pricing
Chinese gas market is likely to remain compartmentalized with low-income consumers supplied from domestic sources
In either current or market environment, Russian gas will likely be able to compete only with LNG, and/or in major industrial centers where economics/geography may favor Russian gas over Central Asian supplies
Key findings
Overview of market trends
0
10
20
30
40
50
60
70
1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007
-0.5
4.5
9.5
14.5
19.5Consumption (lhs)
Growth rate (rhs)
Fast consumption growth,enabled by increase in domestic supply
bcm
Source: IAEA and EcoWin
%
3%7%
20%
70%
In spite of impressive growth, China’s gas market is still in its infancy, what will future hold?
3% 3%
20%
73%
2007 Energy consumption
Primary Power
Coal
Natural gas
Oil
1980 Energy consumption
Coal
Primary powerNatural gas
Oil
0
10
20
30
40
50
60
1995 2000 2003 2006
Consumption by Sector
EU
EU
bcm
Residentialfuel
Industrialfeedstock
Industrialfuel
Oil production
Power gen.Rest
Current policy: End-users are prioritized
Priority Residential sector
Encouraged Industrial fuel for high value- added production and reduction of environmental impact (glass, porcelain)
Restricted Power generation
Forbidden Chemical feed stock (methanol, DME)
0
10
20
30
40
50
60
1995 2000 2006
Consumption by region: Most gas is used in producing provinces
EU
NE China
bcm
North China
East China
South China
Resourceprovinces
Central China
West China
Demand and supply projections
Domestic supply
LNG import
Demand to be met by PNG
0
40
80
120
160
200
240
280
320
2005 2008 2011 2014 2017 2020
Bcm
Expected demand by sector in 2020
bcm
Domestic supply 200
Total demand 302
Industrial fuel 150 Compete against oil products
Residential 60 Compete against LPG
Transportation 20
Industrial feedstock 20 Not compete against coal
Power generation 52 Not compete against coal, nuclear
Source: CERA
Rapid growth backed by new discoveries and increased proven reserves (3.7 Tcm increase in 10 years to reach 5.36 Tcm in 2006)
Infrastructure developments: existing pipelines (West-to-East 1; Shanxi-to-Beijing); planned pipelines (West-to-East 2; Sichuan-to-Shanghai); new LNG liquefaction terminals (Sichuan) – for domestic shipments by road transport
Import LNG projects underway, mostly for Eastern and Southern China markets
− LNG (1 bcma)
− Competes when alternatives are oil based products and LPG
− Competes when end-users include residential customers
− Does not compete when end-users are large power generators
− Pipeline (70 bcma by 2015)
− Import deals signed with Kazakhstan and Turkmenistan (40 bcma)
− MoU on Russian gas (30 bcma from Far Eats by 2015, as Russia abandoned Altaj pipeline)
Natural gas supply potential
Possible import pipeline options for China
China
Mongolia
North Korea
SouthKorea
AralSea
India
Iran
Kyrgyzstan
Kazakhstan
Russia
SakhalinIsland
LakeBaikal
BeijingSeoul
Dauletabad
ArabianSea
PacificOcean
Kovykta
Proposed GasPipeline Routes
Astana
Almaty
Pakistan
Shurtan
Tashkent
Samarkand
Shymkent
Bishkek
Urumqi
Alashankou
AtasuZhanazholAtyrau
Novokuznetsk
Parabel
Kemerovo
KazachinskoyeFrom W. Siberia
Tynda
Komsomolsk
Khabarovsk
Harbin
Shanghai
Russia’s plans for developing gas supply in Eastern Siberia and the Far East
Originally Russia was envisaging supplying gas to China from West and East Siberia and the Far East via two pipelines (Altaj and Pacific) and as LNG (from Sakhalin and Vladivostok area)
In Gazprom’s General Scheme of Development to 2030, Russia has recently focused its targeting of China’s market (North-East and Central provinces, bay of Bohai area), and abandoned Altaj pipeline to save West Siberian gas for domestic and European destinations
The General scheme envisages deliveries of pipeline gas to China and South Korea commencing only by 2020. And the projected range is broad; 25050 bcma
Russia has recently committed 10 bcma to South Korea for 30 years beginning in 2015. The new pipeline will go South from the Vladivostok area (either via North Korea or via the sea)
Hence Russia is prepared to commit 15 to 40 bcma of pipeline gas to China
Additionally Russia will offer LNG from new trains in the Far East
Russia’s plans for developing gas supply in Asia-Pacific
Central Asian gas, where will it go?
There are various plans for shipping Turkmen gas West- and Northbound (currently there is only 40 bcma Northbound exports via/to Russia, and 10-14 bcma Southbound exports to Iran). Yet among new routes, there is more progress on Eastbound routes
Turkmenistan has committed 30 bcma of gas to China via Turkmenistan-Kazakhstan-China pipeline, construction of which has already commenced (First stage shall be launched in 2009, with full capacity reached in 2011). The pipeline will source West-to-East 2 pipeline
Kazakhstan has committed 5-10 bcma from Urikhtau field (developed jointly by KazMunaiGaz and CNPC) and 5 bcma from Aktobe field (developed by CNPC) via Kazakhstan-China pipeline (10 bcma, with potential expansion to 15 bcma)
China and Turkmenistan agreed on $195/mcm (likely to be the same for Kazakh gas). Hence China will be getting 40 bcma of imported gas for below $200/mcm
Central Asian gas going eastbound
Pricing issues in China and Russia
Regulated natural gas price
Upstream price is low for indigenous gas, lower than price of imported natural gas
Retail price are high for consumers, higher than competing fuels
−Twice as expensive as syngas in Shanghai
−More than double the wholesale price for residential and industrial users
−Much more expensive than coal for power producers
Domestic gas pricing
Approval from NDRC Approval from local price bureau
Upstream/Exploration
Midstream/Transport
Downstream/Distribution
Wellhead price
Transport. price
Cost Plus Pricing
End user tariff
Distribution cost + margin
Gas price regulation
0
2
4
6
8
10
12
WEP citygate
Industryfuel
ResidentialPower gen
Shanghai gas prices
$/MMBtu$/MMBtu
0
2
4
6
8
10
12
LNG SichuanPNG
WEP 1PNG
OffshorePNG
City Gate Retail
0
3
6
9
12
15
Shenzhenspot
Industryfuel
ResidentialPower gen0
2
4
6
8
10
ShenzhenContract
Shenzhen Spot
Guangdong gas prices
$/MMBtu$/MMBtu
City Gate Shenzhen
At market price, gas-fired power generation can be limited without policy support; demand may also be smaller from other sectors
The supply gap may be smaller than expected, and be filled without the need for a second pipeline, perhaps until after 2020
Market Demand will be price sensitive
0
20
40
60
80
100
120
Nuclear Coal Gas Wind Oil
Guangdong power on-grid tariff (gas at 5.83/MMBtu)
$/MWh
Market pricing reform with ultimate goal of integration of domestic with international gas markets
Government is committed to market based pricing, but also with some social economic constraints
LNG and international fuel prices effectively become benchmark for new domestic supplies
Gas pricing may change
European markets (primarily in Germany, France and Italy) are key for Russian gas exports, absorbing ca 150 bcma in 2007 (total Russia’s gas exports were 180 bcma). European contracts are long-term and oil-indexed (with a 9 month lag). In the fourth quarter of 2008, an average price for Russian gas in Europe will be $500/mcm (yielding Russian netback of close to $400/mcm).
In spite of EU’s desire to diversify gas imports, Russia will remain the key European supplier in the foreseeable future (Russia currently supplies 26% of European gas consumption)
Lower oil prices will mean lower European prices for Russian gas. Yet if the oil price does not average below $60/barrel for a prolonged period, netback for Russian gas sold in Europe is likely to remain around $100/mcm.
Russian domestic gas prices are envisaged to reach European netback level in/or after 201. Gazprom has recently requested that government introduces a guaranteed minimum domestic price of $80/mcm beginning in 2011
Gas pricing in Russia
Is there opportunity for Russian gas in China?
Price at the border
$/mcm LNG price formula based on JCC at $70/bbl with slope of 0.124
Transmission cost based on WEP !: CNY1 for 4,500 km within China
Exchange rate $1 = CNY 6.83
European parity price at Altai-China border:
Source: xyz energy
0
100
200
300
400
China LNG Vladivostokborder
netback
Europeanparity atborder
Russian pipeline gas may compete against LNG for market
Geography and government policy will be crucial factors determining whether Russian pipeline gas would be able to compete with other exporters of pipeline gas to China
If China’s gas demand does not exceed 200 bcma, there will be only very limited scope for Russian pipeline exports to China
Russian opportunity