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Today in Energy

August 20, 2014

Russia-China deal will supply Siberian natural gas to China’s northern, eastern provinces

graph of Chinese natural gas supply mix, as explained in the article text
Source: U.S. Energy Information Administration, International Energy Outlook 2013, IHS Energy, Eastern Bloc Research
Note: Volumes shown for Russia-China gas deal assume minimal contract obligations. Increases in these volumes will lessen the amount needed from LNG imports and other contracts.

China's natural gas demand has been growing as the government seeks to move away from coal in favor of cleaner fuels. According to EIA's International Energy Outlook 2013 (IEO2013) Reference case, demand will more than triple from 5.2 Tcf in 2012 to 17.5 Tcf by 2040.

Russia's largest natural gas company, Gazprom, finalized a deal with the Chinese National Petroleum Corporation (CNPC) in May. Under the first phase of the new 30-year contract, Russia will supply China 38 billion cubic meters (bcm), or 1.3 trillion cubic feet (Tcf), per year of natural gas starting in 2018. Future phases could increase this volume to as much as 60 bcm (2.1 Tcf) per year. The contract links the natural gas price to international crude oil prices and operates as a take-or-pay scheme: the buyer, CNPC, must pay for the contracted natural gas even if it decides not to receive it.

New natural gas production in Russia will mainly come from fields in eastern Siberia, which currently lack export infrastructure. The planned Power of Siberia pipeline will export gas south to China and east to a liquefied natural gas (LNG) plant on Russia's east coast.

This contract is Gazprom's largest to date. Gazprom has a monopoly on pipeline natural gas export contracts made by Russia. The situation differs from that in LNG markets, where other companies such as Rosneft and Novatek may participate.

China's northern and eastern provinces have growing natural gas demand that cannot be met by existing pipelines or LNG, and the new Russian natural gas will mostly go to meet demand in these regions. China has also committed to purchasing 38 bcm (1.3 Tcf) per year of natural gas from Turkmenistan by 2016, increasing to 65 bcm (2.2Tcf) per year by 2020.

Although China continues to import more LNG, the government is committed to expanding Chinese domestic production, which increases from 4 Tcf in 2012 to 10 Tcf by 2040 in the IEO2013 Reference case. Developing China's shale gas reserves is also an important part of the government's natural gas strategy. According to EIA's assessment of world shale gas resources, China has 1,115 Tcf of technically recoverable shale gas. New production along with imports of LNG will meet rising demand in China's eastern and southern coastal regions.

map of Russian pipelines, as explained in the article text
Source: U.S. Energy Information Administration, IHS Energy, Eastern Bloc Research

Principal contributor: Alexander Metelitsa