The Pricing Debate over Russian Gas Exports to China James Henderson1 NG 56 September 2011 1 Dr. James Henderson has been analysing the Russian oil and gas industry for the past 15 years. Having been Head of Energy for Wood Mackenzie Consultants in the mid-1990s he moved to Moscow as Head of Oil & Gas Research for Renaissance Capital in 1997 and in 1999 became Head of Equity Research. He returned to the UK in 2002 and is currently Head of Russia for Lambert Energy Advisory in London as well as a Senior Visiting Research Fellow at OIES. He completed his doctoral thesis on partnership in the Russian oil and gas industry at the University of London and received his PhD in 2010. i The contents of this paper are the authors’ sole responsibility. They do not necessarily represent the views of the Oxford Institute for Energy Studies or any of its members. Copyright © 2011 Oxford Institute for Energy Studies (Registered Charity, No. 286084) This publication may be reproduced in part for educational or non‐profit purposes without special permission from the copyright holder, provided acknowledgment of the source is made. No use of this publication may be made for resale or for any other commercial purpose whatsoever without prior permission in writing from the Oxford Institute for Energy Studies. ISBN 978‐1‐907555‐36‐7 ii Preface Russian pipeline gas exports to China have been one of the most anticipated global gas trades since the end of the Cold War. There have been many suggested projects, many meetings of presidents and prime ministers, and many false dawns, but so far agreement has proven elusive. The difference, as we enter the 2010s, is that this bilateral trade has potential significance far beyond the borders of the countries themselves. Substantial Sino-Russian pipeline gas trade would have a significant impact Central Asia countries and the global – but particularly the Pacific Basin – LNG markets. The longer it takes these two countries to agree on the terms for bilateral gas trade, the greater the likelihood that China will opt to import larger volumes of Central Asian pipeline gas and Pacific Basin LNG. The major public stumbling block to Sino-Russian gas trade has seemed over the past five years to be disagreement over pricing. But James Henderson’s paper suggests that, while this is certainly a significant issue, there are other fundamental disagreements between the countries notably involving the initial source of the gas to be exported, the question of loans for development and equity ownership of gas and infrastructure. This an excellent summary of recent history and an immensely useful guide to the issues which will determine how these negotiations may unfold, hopefully to a successful conclusion, in the future. Should negotiations fail, or be delayed for several more years, this could have significant consequences for the availability of gas in Eurasia and the Pacific region, and therefore this paper has significant relevance for gas markets beyond these two countries. Jonathan Stern Oxford, September 2011 iii Contents Abbreviations and Units of Measurement .......................................................................................... 1 Conversion Factors ............................................................................................................................. 1 Acknowledgements ............................................................................................................................. 2 Summary ............................................................................................................................................. 3 1. Introduction ................................................................................................................................... 5 2. A History of Discussion, Delay and Disagreement over Price .................................................. 6 3. Finding Russia’s place in the Chinese Gas Supply-Demand Balance .................................... 11 China’s Diversified Supply Portfolio ................................................................................................ 11 Chinese Indigenous Supply Potential ............................................................................................... 12 LNG Imports ..................................................................................................................................... 13 Pipeline Imports from Central Asia .................................................................................................. 14 Piped Gas from Myanmar ................................................................................................................. 18 Conclusions on China’s Gas Supply Options ................................................................................... 19 4. Eastern Gas Markets from a Russian Perspective ................................................................... 20 5. The Negotiation over Gas Price : Clear signals are now being given by the market ............ 22 Comparative Gas Prices for China .................................................................................................... 26 Chinese Domestic Gas Prices ........................................................................................................... 26 The Turkmen Price Benchmark ........................................................................................................ 27 Imported LNG Prices ........................................................................................................................ 29 The Price of Gas from Myanmar ...................................................................................................... 32 Conclusions – The Benchmarks for a Potential Russian Gas Export Price to China ........................ 34 6. Bridging the Price Gap ............................................................................................................... 37 7. When will agreement on Russian gas exports to China be reached? ..................................... 39 Thoughts on the Russian perspective ................................................................................................ 39 Thoughts on the Chinese Perspective ............................................................................................... 42 8. Conclusions – Are there any keys to unlock the current impasse? ........................................ 45 Appendix 1 - East-Siberia Pacific Ocean (ESPO) Provides Clear Analogies for Gas Exports to Asia ……………………………………………………………………………………………...……49 Analogies and Implications for Gas Exports .................................................................................... 52 Bibliography ........................................................................................................................................ 54 iv Figures, Tables and Maps Figure 1: Forecast of China Gas Supply and Demand ................................................................... 11 Figure 2: Potential Central Asian Gas Exports to China ............................................................... 18 Figure 3: Forecast Gas Exports from Russia to Non-CIS Markets ............................................... 21 Figure 4: Estimate of Gazprom Production Profile to 2030 .......................................................... 22 Figure 5: Benchmark Prices for Russian Gas Exports into Western China ................................ 35 Figure 6: Comparison of Netback Prices in West Siberia .............................................................. 36 Figure 7: Comparison of Netback Prices in East Siberia ............................................................... 38 Figure 8: Schematic of European and Chinese Netback Prices to East and West Siberia .......... 39 Figure 9: Gas Consumption Per Capita across China’s Provinces (2009) .................................... 42 Table 1: Current and Planned Regasification Terminals in China (bcm) ..................................... 14 Table 2: China’s currently contracted volumes of LNG ................................................................. 30 Table 3: LNG prices under current contract terms at various oil price levels .............................. 31 Table 4: Gas Export Statistics for Myanmar, 2006-2011 ................................................................ 32 Table 5: Link between Myanmar Export Price and Oil Price ........................................................ 33 Table 6: Implied Myanmar Gas Export Prices at Various Oil Prices ............................................ 33 Map 1: Chinese Gas Import Options (volume estimates in bcm) ................................................... 19 Map A1: The Route of the East Siberia–Pacific Ocean (ESPO) Pipeline .................................. 51 v Abbreviations and Units of Measurement bbls Barrels bcm Billion cubic metres bcma Billion cubic metres per annum bn bbls Billion barrels boepd Barrels of oil equivalent per day bpd Barrels per day E&P Exploration and Production ESPO East Siberia – Pacific Ocean (Pipeline) FSU Former Soviet Union IOC International Oil Company kboepd Thousands of barrels of oil equivalent per day kbpd Thousands of barrels per day km Kilometres mm bbls Million barrels mcm Thousands of cubic metres mmboepd Millions of barrels of oil equivalent per day] mmbpd Millions of barrels per day mmbtu Million British thermal units mmcm Millions of cubic metres mmt Millions of tonnes mmtpa Millions of tonnes per