A massive work of infrastructure has just been brought online, and its geopolitical implications are explosive.
Last week, the presidents of Russia and China jointly inaugurated one of the biggest pieces of gas infrastructure in the world.
The “Power of Siberia” pipeline is sending gas from eastern Siberia over 3,000 kilometers of tundra to northern China; and when it reaches its full capacity of 38 billion cubic meters a year, it will account for about one-sixth of China’s imported gas demand.
To some, this is a minor amount and not a reason to worry. Yet a sixth of imports is a pretty solid portion for the world’s largest gas import market. What’s more, there is already talk about Power of Siberia 2, which will bring the Russian share in China’s imported gas market higher, if it comes to be.
As is invariably the case with large-scale Russian projects, there are people who want to know: should the West be worried?
To answer this question, we need to first clarify “the West”. In the past, the West was a unified concept including Western Europe and the United States. Now, the former is often at odds with the latter on topics spanning trade balance and free market practices. That’s what globalization has accomplished.
There is no longer a unified West, at least in the area of trade and energy security, a fact made obvious by Germany’s unwavering support for another Russian project, the Nord Stream 2 pipeline, in the face of vocal U.S. opposition that at one point escalated to threats of sanctioning all companies involved in the project. So, to rephrase the original question, who should worry about Power of Siberia, and should anyone worry at all? Related: Scientific Breakthrough Could Upend Lithium Market
The most immediate, knee-jerk answer would be: all other exporters of gas to China. It’s a no-brainer on the face of it: the Power of Siberia will bring into China 38 billion cubic meters of gas every year, which will unavoidably displace supply from other sources. Yet it pays to look beyond the face of things.
In this case, Russian gas will first and foremost displace coal, not gas from other sources. The Power of Siberia will ship gas to northeastern China, which has so far been overwhelmingly dependent on coal for its energy needs, as Reuters’ Clyde Russell noted in a recent column. This part of China does not import LNG, Russell pointed out, so there will be no displacement of LNG imports. For now.
A lot of LNG export capacity is being built with the future Chinese market in mind. There seems to be unanimity among energy forecasters that this market will only continue growing in the observable future, even if this growth moderates in pace. So everyone is betting on China specifically—and Asia more broadly.
In this context, any other source of supply is a challenge, and if this source is a country on a strategic path of forging closer ties with its neighbor in the southeast, the challenge becomes more serious.
Russia is staking a major claim in China’s pipeline gas imports, so far dominated by Turkmenistan and Kazakhstan. It also became China’s second-largest LNG supplier this October, overtaking Malaysia. And it is, like others, expanding its LNG capacity too. Given the fact it has the world’s largest natural gas resources and a lot of them have yet to be tapped, this gas expansion plan is something other gas and LNG producers would do well to keep an eye on. But, as Russell points out in his column, there is a much bigger cause for concern: oversupply.
China’s October gas imports—both pipeline and LNG—fell enough to suggest the slowdown in demand many have been warning about earlier this year is already here. In all fairness, the October decline was the result of a number of reasons that had nothing to do with demand as such, including an LNG terminal shutdown and a relaxation of Beijing’s coal-to-gas policies in the face of the local economic slowdown. In other words, demand will rebound. It’s just not clear how completely it will rebound and when. Related: The Best Way To Invest In The Energy Sector In 2020
These are the realities of energy markets everywhere: you cannot predict demand and adjust supply to fit that perfectly. The Power of Siberia is just another pipeline—a large one, true, but one of many. What Western—and this means U.S.—gas producers should perhaps worry about is the long-term profitability of their LNG projects. The reason for this worry has only partially to do with Russia. It has just as much to do with rival capacity in Australia, Qatar, and Africa too. In the global LNG market, which is a lot more competitive than the Chinese pipeline gas market, the Power of Siberia is more or less irrelevant, at least for the time being as it will only reach its full capacity in 2025.
In LNG, however, competition is intensifying and it will continue intensifying as storage facilities in Europe fill up and prices drop further because of all the new supply coming on the market, a lot of it from the United States. Analytical firms are warning of a slowdown in LNG demand in the immediate term, despite seasonal patterns that would normally suggest greater demand for the fuel.
And then, of course, there are the Chinese retaliatory tariffs against U.S. LNG that are a stumbling block on the road for U.S. gas producers with an eye on the Chinese market. Pipeline Russian gas is cheaper than tariff-heavy LNG for sure. But on the positive side, the tariffs may not be in effect forever. If there is one thing that the gas import patterns in Europe—Russia’s largest gas buyer—can teach us is that as long as the price is right, there will be buyers for gas and LNG regardless of where it comes from and how it comes, by pipeline or by tankers.
By Irina Slav for Oilprice.com
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