The past two weeks have been particularly busy for Russia and China as they discuss energy deals. Last week, Russian Deputy Prime Minister Igor Sechin traveled to China and struck a series of deals on behalf of Russian oil giant Rosneft, of which he is a board member. In June, the two sides agreed to a $270 billion oil deal under which Russia, starting in 2015, will export 300,000 barrels per day to China for 25 years, on top of the 400,000 barrels per day it already delivers noncontractually. In addition to this deal, Sechin and Rosneft agreed with China National Petroleum Corp. to construct a new oil refinery in the Chinese city of Tianjin and launch a joint venture to open gas stations across China that would be fed by Russian oil — Moscow's first venture into China's gasoline market.While oil deals between Russia and China have been fairly easy to make, Beijing has recently begun to shift its focus toward natural gas. China's natural gas consumption has grown steadily over the past decade, and Beijing has been considering multiple sources and routes through which to import the resource. In 2012, China imported approximately 42.5 billion cubic meters of natural gas — nearly 30 percent of the country's total annual consumption of 143.8 billion cubic meters. Beijing has forecast that its natural gas consumption will continue to grow rapidly, estimating that it will reach between 200 billion and 250 billion cubic meters by 2020. This is conservative compared to the International Energy Agency's predictions of a growth to more than 300 billion cubic meters a year by 2020, which, if true, would mean that China's natural gas consumption would nearly triple within a decade.
China is looking to expand its domestic natural gas production quickly, with a heavy emphasis on tight gas production (50 billion cubic meters by 2015) and shale gas production (60 billion to 100 billion cubic meters by 2020). However, Beijing is not likely to meet its shale gas production goal, and is counting on imports to make up the difference. Currently, about half of China's natural gas imports are liquefied natural gas — mostly from Australia, Indonesia, Malaysia, Qatar and others. In 2012, China imported 20 billion cubic meters of liquefied natural gas; the only piped natural gas imports were from Turkmenistan and totaled approximately 21.3 billion cubic meters.
For Asian customers, liquefied natural gas is currently far more expensive than piped natural gas, with a price difference of more than $200 per thousand cubic meters. However, China expects liquefied natural gas imports to become cheaper in the long term and is either building or planning to build additional liquefied natural gas import facilities. The Asian natural gas market historically has been defined by long-term contracts — often covering a period of 20 years or so — in which the price of natural gas sold is indexed to the global price of crude oil. This, however, is changing, as new sources of liquefied natural gas in North America, East Africa and possibly other regions continue to emerge over the next decade.
As a result, natural gas prices are shifting toward gas-on-gas pricing mechanisms, and more contracts will be based on these mechanisms. For instance, in June, Korean Gas Corp. signed a 20-year contract with the United States' Cheniere Energy, Inc., setting the price at a 15 percent premium to the benchmark natural gas price in the United States, plus an additional $106 per thousand cubic meters. This shift will take the next two decades to play out, but China is thinking about the long term.In the shorter term, Beijing is primarily looking at piped natural gas because of its lower price and greater security. China has deeply rooted concerns about limiting its energy imports to supplies that are transported over sea, particularly since competitions over resources and security in East Asian waters have intensified in recent years. In order to ensure that it has a more secure avenue for natural gas imports than these restive sea lanes, Beijing has turned its gaze westward to overland transportation routes.