Lack of Russian gas strangles China
June 19, 2013
Published in corporate Gazprom Magazine Issue 6
Early this year above 30 per cent of China’s territory (including Beijing, the capital city) was blanketed with heavy smog for a few weeks. In some areas the air pollution 40 times exceeded the safe level. The mortality rate increased sharply within the environmental disaster area. In order to reduce emissions, Chinese industrial facilities were forced to shut down. As a result, the Chinese Government took a number of measures to speed up signing of an agreement for Russian gas supply to China.
Coal and cars
China currently satisfies about 70 per cent of energy demand through the domestic coal production. It is the world’s leader by coal consumption. This is the exact reason for ecological disasters in largest Chinese cities. According to the World Health Organization and the World Bank, the world’s most polluted cities are the Chinese ones. However, the rest of the world features cars as the main air polluters in cities. There are 20 times less cars per capita in China than in the USA, and the main polluters there are coal-fired power plants. At the same time, continuous economic growth brought about the emergence of a middle class in China, and that entailed a rapid development of the domestic car market during the recent years. The annual car sales in China nowadays exceed those in any other country. It means that there will be absolutely nothing to breathe in Chinese cities soon.
The problem could be solved by converting coal-fired plants to much more environmentally-friendly natural gas, and cars – to gas-powered engines. If we assume Euro 4 petrol as a reference, we see that compressed natural gas is nearly 3 times greener by NOx, 14 times greener by CH, above 16 times greener by benzopyrene, 12.5 times greener by CO and 3 times greener by soot (100 times greener versus diesel-powered vehicles). The Chinese clearly understand that fact, that’s why they already have 1.5 million natural gas vehicles and this number keeps growing fast.
China imported 14.68 million tons of LNG in 2012 versus 12.21 million tons the year before (20.3 per cent increase). The average LNG price for China rose to USD 560 per ton (from USD 472 in 2011). Therefore, this country pays for gas as much as European customers of Gazprom.
China rapidly expands LNG purchase volumes. The country imported 14.68 million tons of LNG in 2012 versus 12.21 million tons the year before (20.3 per cent increment). LNG average price for China rose to USD 560 per ton (from USD 472 in 2011). Therefore, this country pays for gas as much as European customers of Gazprom. Under these conditions the negotiations on huge Russian gas supplies to China intensified. In late February Beijing hosted the meeting of Alexander Medvedev, Deputy Head of Gazprom’s Management Committee with Jiang Jiemin, Chairman of China National Petroleum Corporation (CNPC) and Wang Dongjin, Vice-President of CNPC. Gazprom and CNPC agreed to step up negotiations on Russian natural gas supplies through the eastern route (supposed volume of 38 billion cubic meters of gas annually) with a view to sign a gas purchase agreement before late 2013. Xi Jinping, the new Chinese leader, visited Moscow in March and confirmed China’s intent to initiate large-scale purchases of Russian gas. The supplies are supposed to commence in 2018. Later on, this volume may be increased to 60 billion cubic meters of gas annually.
Western corporations have been lately offering their shale gas production technologies to China. In fact, shale gas is not yet being produced in China. Moreover, a number of Chinese experts noticed that enormous volumes of water are required to extract gas from shale via hydraulic fracture, and China has limited water resources. Due to industrial pollution, over a half of the domestic water resources are not potable, and one third is unfit even for process needs. A lot of rivers have simply vanished from Earth. It’s no secret that fracking fluids are admixed with specific chemicals which have already resulted in the ground water contamination in a number of US regions.
Another problem of shale gas production is that this way of gas extraction can cause earthquakes. Violent earth tremors that bring about numerous destructions and casualties are quite frequent in China anyway. The citizens are unlikely to welcome with excitement the technologies capable to provoke such consequences.
One should keep in mind that the prime cost of shale gas is higher than that of the conventional one. This figure equals around USD 150 to 200 per 1,000 cubic meters in the USA, and USD 350 to 400 in the UK. Wells drilled by American Exxon in Poland could not at all produce a gas flow sufficient for commercial production. The prime cost of Chinese shale gas is estimated to approach to the British costs rather than to the US ones, that’s why it’s no good to expect brilliant success here. It will be reminded that, according to Gazprom Export’s forecast, the average European price for Russian natural gas in 2013 will amount to USD 370 per 1,000 cubic meters.
The American shale gas is unlikely to have a great export capacity in a liquefied state. The fact is that gas production in the USA started declining late last year and the trend retained in the beginning of this year. Shale gas appeared to be its own enemy, because the production growth brought down prices for the blue fuel. As shale gas had to be sold below its prime cost, the gas industry had to drastically reduce the scope of drilling. In late May the gas industry engaged as few as 340 drilling rigs. It’s the lowest number since 1999. For reference, there were about 1.5 thousand drilling rigs in operation during the 2007–2008 production bloom. The ‘shale bubble’ will burst soon, massive insolvency of US producers will start and major companies will suffer multibillion losses. We can expect that the domestic shale gas production will slump soon and the USA will have to expand gas supplies from other countries.
Gazprom and CNPC signed the Memorandum to supply 68 billion cubic meters of gas annually through the western and eastern routes several years ago, but it is not yet effective. All along the Chinese tried to negotiate a lower price than that of Gazprom’s customers in Europe. However, they will soon have to accept the pricing conditions imposed by the Company. After all, clean air is essential for everybody – both for the poor and the country’s leaders.
Gas consumption in China has been growing fast lately. In 2006 China consumed 56 billion cubic meters of gas, and in 2012 this figure came to as much as 150 billion cubic meters. LUKOIL analysts forecast that in a decade the country will need 800 billion cubic meters of natural gas.
Gas consumption in China has been growing fast lately. In 2006 China consumed 56 billion cubic meters of gas, and in 2012 this figure came to as much as 150 billion cubic meters. LUKOIL analysts forecast that in a decade the country will need 800 billion cubic meters of natural gas. It’s mainly explained by the fact that a few years ago China started manufacturing domestic combined cycle power plants that are much cheaper than the German ones. Now China has an essential tool for large-scale gasification of its power industry. Otherwise, the environmental problems will accrue there.
Gazprom is already developing the gas supply infrastructure. The Sakhalin – Khabarovsk – Vladivostok gas trunkline was put onstream in 2011. The Chayandinskoye field in Yakutia will start gas production in 2017. It’s well-known that Russia is the world’s leader by natural gas reserves, that’s why it’s exactly our country that can secure long-term demands of China. At the same time, Russia will manage to succeed in upgrading its economy. The Russian Government approved a development program for an integrated gas production, transportation and supply system in Eastern Siberia and the Far East, which assumes that all the produced gas will be processed. This gas is intended for the extraction of helium, ethane, propane, butane, etc. Gazprom is expected to coordinate the work.
European and Asia-Pacific countries are forecasted to import great volumes of polyethylene, polypropylene, PVC, etc. as the domestic feedstock is not enough for their manufacturing. Hence, Russia will manage not only to satisfy its domestic demand, but also to become a major exporter of gas chemicals. Major international corporations will possibly realize in time that it’s more profitable to create their own facilities to manufacture high-tech products rather than simply buying these goods in Russia.
In order to avoid full dependence upon China, Russia intends to develop the cooperation with Japan and the Republic of Korea. These countries are already purchasing LNG from the Sakhalin II project. It is planned to commission an LNG plant near Vladivostok in 2018. Therefore, Russia has everything to turn into the leading player of the Asia-Pacific market.