The Russia-China Gas Deal and the rest of us

Sealed at dawn, May 21, 2014, the Russia-China mega gas deal, in the offing for more than a decade can safely be added to the list of famous milestone events that altered the dynamics of the world. Hardly does an energy transaction make the front pages of mainstream media but this deal had far reaching ramifications considering the actors and the potential impact on the world’s economic and political architecture as we know it. Russia seems to have secured a satisfactory deal, buoying its confidence and dwindling financial arsenal in time for the perpetual wrangling with the US and much of Europe. China has also gotten a fantastic energy deal that further impels its inexorable economic and political rise amongst the comity of nations. For China though, this deal is just an addition to an even bigger but less heralded one signed with Turkmenistan recently for the supply of about 65bcm/year by 2020 (Russian supply through Siberian Power pipeline peaks at  38bcm/year).

Beyond the political dimensions, the impact of the deal on the much anticipated ‘golden age of gas’, financial markets (US dollar in particular) and the planned liquefied natural gas (LNG) export projects around the world are worth discussing.

Anchor projects & the golden age of gas

There is a consensus in the energy world that gas would become the energy source of choice in the foreseeable future with usage expected to grow in massive leaps. Many have predicted the ‘golden age of gas’ but the realization of that has always depended on how quick and flexible the necessary networks emerge. This deal, described in gas commercial parlance as an ‘anchor project’ is a testament to the fact that that golden age might be upon us earlier that envisaged. Anchor projects are huge infrastructure projects that give natural gas supply a foothold in new markets, becoming the levers on which smaller projects can leverage on. Siberian Power, with three delivery points in North Eastern China, will create a new hub that could stimulate gas utilisation beyond anticipated estimates and more importantly spur other huge gas projects targeted at Japan and the Koreas. Furthermore, if the price of $350/Bcm been reported is true, that’s a discount on the $380/bcm   Europe pays for Russian gas. The conflation of these attractive prices and the huge capacity of the infrastructure could have impact on gas projects from British Columbia to Brass. 

Let’s look at the numbers. The US Energy Information Administration (EIA) in its latest overview on China’s natural gas industry (February 2014) reported that the country consumed about 184Bcm in 2012, importing about 53Bcm (29%). It also estimates that demand would increase by about 50% to about 275Bcm by 2020. Furthermore, the China government’s 12th five year plan anticipates gas demand of about 286Bcm by 2020, close to the EIA’s estimates. Does this mean that if the Turkmenistan supplies (65Bcm) and Russian supplies (38Bcm) go ahead as planned, regional pipeline imports alone would provide about 40% of China’s natural gas demand? That would be some achievement.

Arguably, there are uncertainties around these estimates and also assuming that Chinese domestic conventional and unconventional production remain flat, it’s still worth noting that major gas export (LNG) projects around the world might need some rationalization. Even though the executed LNG GSPAs with China would subsist for now, spot prices could be under strong downward pressure in the foreseeable future.  High cost and distant LNG projects in Australia, Mozambique, Tanzania and more importantly Nigeria might require fresh fiscal incentives and rationalisation for them to proceed. Brass LNG in Nigeria has already suffered inscrutable delays with the likelihood of progress diminishing with time. Is this Russo-Sino gas deal another nail on the coffin?

Currency wars?

Alexey Miller, the gas czar of Russia described certain aspects of the deal as ‘commercial secrets’. Could one of the secrets be a provision that prescribes payment in a currency other than the US dollar? Maybe the Rouble, Remnibi or even the Euro? Even though this is a remote possibility, but it won’t be out of character for both parties with mutual dislike of the US insert provisions for such payments once the conditions are ripe. This has its complications for both parties but there is a precedence. Russia’s second largest bank, VTB has a deal already with the Bank of China to develop partnerships on Rouble and Remnibi settlements.

 Arguably, this transaction involves only a one way payment from China to Russia but it would be naive to completely rule out the possibility of payments in another currency but the dollar. If these provisions exist and is applied, it would have a seismic psychological impact on the finance world and also give impetus to the clandestine clamour by some nations for the replacement or displacement of the US dollar as the world’s international currency. That’s why this deal is not just a gas deal, but could be a forerunner of bigger events that would shift the current East – West balance of power.

Notes for Nigeria

Nigeria can no longer afford to be reactive to the continually changing dynamics of the world’s energy and political landscape. We might not be a superpower but as many as clamored there must be a coherent, robust response to the Chinese ascent while we also use our gas resources not only to earn revenues but also as tool of influence in this ‘golden age of gas’. In my opinion,  ‘Crude oil makes you money, but gas gives you influence’. Ask Russia and Qatar about that.

Adedamola Adegun