A potential long-term gas supply deal with China would enable Gazprom to better withstand backlash from European governments over the current threat of a disruption in Russian gas exports and the evolving perception that the state-run company is unreliable as a gas supplier, according to IHC Inc., report.
Boosting gas exports to Asia will make Gazprom less reliant on revenues from exports to Europe, potentially making Russia’s foreign policy more intransigent on Ukraine or other matters.
The ongoing Ukraine crisis is providing further impetus to Russia’s determination to shift its focus eastwards, eyeing Asian gas customers in a bid to reduce Russia’s own heavy reliance on the European market. Two of Russia’s key energy target markets – China and Japan – face rising domestic gas demand and will likely seek to use the threat of further Western sanctions against Russia to push for cheaper Russian gas, although their chances of realizing this objective are limited.
Russia’s annexation of Crimea, together with the threat of disruption to Russian gas exports to Europe via Ukraine, has retriggered the policy debate in Europe over the need to diversify the continent’s gas suppliers and reduce reliance on Russian gas imports.
The Ukraine crisis has also prompted Russia – already aiming to bolster energy ties with Asia – to strengthen its resolve to diversify its gas export partners by targeting markets in Asia, thereby easing Russia’s own dependence on Europe as the primary outlet for its gas exports.
Gazprom hopes to finalize a long-term gas deal with China National Petroleum Corp. (CNPC) during President Vladimir Putin’s planned visit to Beijing next week (May 19-23), which would give Russia an important geostrategic victory as its faces another likely round of economic sanctions from the West.
China could seek to use the Ukraine crisis and the sanctions threat against Russia to push for eleventh-hour adjustments to the proposed base gas price in the contract, although CNPC’s leverage is limited by China’s growing need for additional gas imports.
Although Japan is under pressure from the West to take a stronger stance against Russia, domestic economic pressures are likely to trump geopolitical considerations, with Japan unlikely to limit its energy trade with Russia and perhaps seeking to take advantage of Gazprom’s determination to look eastwards.
Various reports suggest that the Russians and Chinese are close to agreeing to a base contract price of USD10-11/MMBtu. This figure suggests China is willing to pay a higher price for Russian gas imports than previously. A number of factors, such as rapidly rising gas demand, domestic pricing changes, and disappearance of cheaply-priced supply alternatives have raised China’s tolerance for a higher Russian gas price.
Mitigating Japan’s rising electricity costs is an important part of the government’s effort to lower the cost of doing business in Japan and increase the competitiveness of Japan’s economy. Lowering the cost of energy imports is therefore an important factor in Japan’s economic recovery efforts. Although the Japanese government has sought to exert pressure on Gazprom to offer lower LNG prices, its ability to capitalise on the Western sanctions threat hovering over Russia will be limited, given that Russia’s current and future LNG export volumes already are overwhelmingly directed towards Asia. More important will be an influx of new LNG from the US and Australia after 2017, which will ease supply tightness in the LNG market globally and possibly give Japan more leverage in negotiating supply prices with Russia.