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Russia could offer China better gas pricing

Russia is well positioned to supply more pipeline gas to China as a weaker currency makes pricing more competitive

The ruble-dollar exchange rate has depreciated significantly over the past 12-18 months. “We don’t think it will recover to previous rates, so what that does is push down the cost of Russian supply. Around 80% of Russian gas costs are ruble-denominated, so the ability of Russia to offer competitive supply into China is not something that has been lost in Beijing,” Gavin Thompson, an Asian gas specialist at energy research firm Wood Mackenzie, told delegates at the GasTech conference.

“We think Chinese buyers continue to push hard for attractive pricing. But in a weaker ruble environment Russia will potentially be able to offer more attractive pricing into China”, he added.

The ruble-dollar exchange rate has depreciated some 80% with $1 fetching around 65 rubles in early November, up from around 34 rubles in May 2014.

China has already signed one contract for East Siberian gas to be delivered when the historic Power of Siberia pipeline deal was sealed in May 2014. But a second pipeline deal, Altai, that could see gas piped from West Siberia, continues to be negotiated on and off between the two countries.

If successful, the Altai deal could reduce China’s future incremental demand for liquefied natural gas (LNG). Russian gas looks particularly well positioned, especially if China’s development of shale gas disappoints, said Thompson.

However, without breakthroughs in technology and cost reduction for domestic shale, there will likely be a greater reliance on imports and more opportunity for both LNG and Russian gas.

While the Chinese gas market is experiencing growing pains this year, which “came as quite a shock”, Thompson expects the market to expand significantly in future.

During the first-half 2015 there has been negative growth in LNG imports and gas demand expansion of only 3%. But he says this is cyclical, as investment slowed and China’s regulated gas prices remained high.

“High gas prices and low oil prices are not a great cocktail if you want to generate lots of new demand. So movements on price reform, which the government can control, and movements of oil prices, which they cannot, are two key factors, which will put us back on the road to growth, even if we don’t see 20% plus growth numbers again,” said Thompson.

Positively, Thompson expects city-gate gas prices to be cut, which will drive a demand response, while a recovery in oil prices and environmental targets bode well for the domestic gas markets.

For now though the Chinese gas market looks oversupplied with contracted LNG - as projects ramp up in Australia - and pipe imports. The three national oil companies, which control 93% of China’s gas supply, are considering all their options. It would be attractive for them to shut-in high cost domestic production and buy cheaper spot LNG cargoes, but such a strategy could face political resistance, as it would have negative social effects, such as unemployment.

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