The Power Of Siberia And China's Next Natural Gas Moves

Authored by Tom Luongo,

Gazprom’s Power of Siberia pipeline is more than two-thirds complete.  It will be delivering gas to China by the end of this year.  A second pipeline is still under discussion.

A report yesterday from Alex Mercouris at The Duran noted some frustration from China over the irregular liquefied natural gas (LNG) supplies coming from its contract partners in Uzbekistan and Turkmenistan.

It seems the Turkemi and Uzbek governments are shaking down China for better prices because gas demand in Western China’s autonomous regions is growing rapidly.  Complicating matters is the tough winter in Europe which spiked LNG demand there as well.

Remember, Gazprom recently announced that delivered volumes to Europe rose by 8% in 2017 over 2016.  And that number is likely to rise again this year.  Even the U.K. is begrudgingly buying Russian LNG from the Yamal LNG project on the Eastern Baltic coast.

China National Petroleum Corp., CNPC, just signed a deal with Cheniere Energy to supply 1.2 million tons of LNG annually.  China’s demand for natural gas has to rise as its leadership deals with the increasing costs of air pollution from running a major portion of its economy on coal.

This is part of the reason why Russia and China hooked up for the original Power of Siberia pipeline in the first place.  And it’s why I have little doubt that a second pipeline is a slam dunk. This would be the expanded Altai Pipeline or Power of Siberia 2 that was postponed in 2015 but is now back on the table.

Last year China and Russia signed an MOU on Power of Siberia 2.  Though no formal agreement has been reached, it’s obvious both parties want this done.  The question for China is likely price.  And they are not above holding out for better terms and cheaper gas prices.

So, they’ll string Gazprom along on price by talking engineering, etc. for a few more months while they wait to see if the projected glut of gas materializes.

Natural gas prices have severely corrected in the past few weeks, down from nearly $3.50/mmbtu to today’s price at $2.62.  Inventory draws were below expectations and U.S. domestic supply is set to outstrip demand this year as record production numbers necessitate changes.  But, this is the U.S. domestic situation.

Hence, China looks like it got a good deal using Henry Hub pricing for its contract with Cheniere.  And this correction is likely what Chinese leadership was hoping for before committing to Power of Siberia 2.

Urals Stalking Horse

This is a pipeline China knows it needs but it still doesn’t want to overpay.  I suspect, however, if Gazprom plays true to form that it will tie its gas price to the price of oil.  And with the new Shanghai oil futures contract now trading this provides an opportunity to deepen interest in it.  Any future gas deals between China and Gazprom can be indexed to that contract rather than West Texas Intermediate or Brent Crude.

Russia wants its Urals grade of medium sour oil to be a global benchmark.  And, that’s exactly what the Shanghai contract trades.

With U.S. production spiking it will be hard to maintain these oil and gas prices.  Brent has corrected back to below $63 per barrel and, looking at the chart, I wouldn’t be surprised to see it correct further towards $55-57 per barrel.  In fact, I know oil prices are likely to correct hard because Goldman Sachs is now calling for $80 oil within six months.

Nothing says, “Short oil,” like a Goldman bullish call on it.

This downturn in prices is putting upward pressure on the Russian ruble, now no longer looking at sub RUB56 versus the U.S. dollar but likely pushing back towards RUB60.  Remember, the Russians don’t care about lower oil and gas prices as much as the other major producers.

The ruble floats openly while the Saudi and Qatari Riyal are both pegged to the dollar.

Moreover, the price of LNG has held up much better than was expected.  The market was supposed to be glutted going out to 2020, but as we’ve already seen European LNG demand has been strong, but Asian demand, especially Chinese, has kept the market surprisingly tight.

LNG imports, according to a report from Poten and Partners in November put China’s LNG imports up 42% year over year while prices stayed above $9/mmbtu.

So, don’t be surprised if we don’t hear something about Power of Siberia 2 in the next few months.  Between the unreliability of China’s central Asian suppliers, falling gas prices and stubbornly high LNG prices, that pipeline is looking more and more economic for China.

Comments

DownWithYogaPants HoyeruNew Wed, 02/14/2018 - 02:45 Permalink

It's not about someone "venting" frustrations.  It's about the petrobuck and the criminal banking cartel that presently rules the world.

.......in regards Russia I sometimes get the idea that although Putin has made great strides in ridding Russia of criminal western banking influences that much remains.

The real pity is the Federal Reserve Note and how we in the USA have given away control of our own destinies through private central banking.  We have enormous potential in the USA.  But potential it will stay until we have a United States Note.

In reply to by HoyeruNew

yellowsub DownWithYogaPants Wed, 02/14/2018 - 15:03 Permalink

Nothing stopped the US from doing the same development deals with Africa and other nations decades earlier.  Now China stepped up and created lucrative trade deals with them and of course their influence will grow.  

The US doesn't want to build relations or build up nations.  They only destroy or have great advantage over the other country.   

Perhaps this was done so the US will eventually have real enemies to justify spending more billions per year.  

The potential is there but the more difficult task is to clean the whole house.

In reply to by DownWithYogaPants

Lore HRClinton Wed, 02/14/2018 - 02:26 Permalink

@ HRClinton: That's stupid bunk.  The problem is that neither Russia nor China is America's bitch. To the supplier goes the spoils, and thus far, it appears that the supplier is NOT American-controlled.  Tough luck.  Guess it's time for the American warhawk corporate whores to vent their frustrations on some Middle Eastern target, or maybe throw up some more sanctions around Venezuela.  After all, punishing the general populace is a great way to win hearts and minds. 

In reply to by HRClinton

MK ULTRA Alpha Lore Wed, 02/14/2018 - 08:33 Permalink

The comments on this board are so stupid it's hard to believe. It's all framed through an anti-American lens. The pipeline Power of Siberia won't be completed for another two years, December 2019, and the 30 year price agreement doesn't start until 2025. The pipeline can't operate at full capacity because China must use it's reserves of natural gas. So the massive pipeline which will conquer the world, Power of Siberia, will not be supplying the amounts of LNG as the author tries to make us believe.

The US just sold a tanker full of LNG to China, a US China LNG terminal is being completed in eastern China. US LNG will be a competitor in the China market.

Right now, Russia is trying to use ice breaker routed tankers to China from north Siberia tapping the Yamal field,. a natural gas field owned by the French-China-Russia. The pipelines into China and the natural gas fields which will supply the pipeline has been funded by China, some of it through Silk Road funding, the other pipeline through part of Mongolia, waits for more China investment, the Chinese project how much draw down on their domestic supply of natural gas before investing in over capacity.

The overall macro of the Russia China natural gas plan is the Chinese are the investors.

The US just sold a tanker full of super high quality shale oil to UAE, in the Persian Gulf. There will be many more shipments of this high quality grade shale oil. It's cheaper to refine.

This is the first phase of the US LNG export market, pipelines and export terminals are being built and LNG shipments are being sold all over the world and in Russia's backyard, the Baltic states and Poland. During Obama era, permits for LNG terminals were denied, now permits are approved. So Russia and Qatar have a competitor. (Qatar is the largest producer of LNG in the world and is the richest per capital in the world.)

It's funny with the US now number two crude oil producer and soon to bypass Russia as number one, the world according to this author is going to change to a Russia China oil price metric because of the Russia China oil trade? Russia just recently edged out the Persian Gulf as number one crude supplier for China, this could change because of price and consumption patterns.

Russia has Central Asia LNG competitors, which the author brushed off for his speculative reasons, any price China locks in from a Russian pipeline deal would be for a limited time. And the same pipelines from Kazakhstan the author wrote was stalling the Chinese for LNG, well that same pipeline is used by Russia to transport LNG. 

The reasons this author gives is pure and idle speculation. And then reading the comments, man it's too much to believe.

 

 

In reply to by Lore

SoDamnMad HRClinton Wed, 02/14/2018 - 04:58 Permalink

 lotta down votes. Best you said it as, "China really trying to take advantage of Russia. China only pays for the line into China while Russia foots the expenses of the pipeline and pumping stations to the Chinese border on top of giving them ultra cheap prices."   Europe got it's foot shot off by the US sanctions whose intent was to move LNG (Cheniere) into Europe and cut off Gazprom.  Germany did OK with Nordstream but everyone else took it in the shorts.  Russian gas was inexpensive and reliable. It still is.  Open your eyes and renegotiate deals with Gazprom Europe.

In reply to by HRClinton

CHX13 HRClinton Wed, 02/14/2018 - 05:07 Permalink

Russia has oil and nat gas... they swap it for gold...

China is a main producer of goods, exports for fiat/dollars, which are turned into gold at the SGE...

US has an ever-increasing amount of debt, exports dollars and "leases" all its gold holdings (and then some!!!) into the "markets".

Something is gonna give here before long... Stack accordingly.

In reply to by HRClinton

khnum Wed, 02/14/2018 - 02:20 Permalink

All that activity close to US interests (i.e planet earth) Trump will definately have to put bases in Kazakhstan and Mongolia to offset this economic threat.(yes this is sarcasm)

Easyp Wed, 02/14/2018 - 05:20 Permalink

Trade is better than war so good for Russia and China.  What I find interesting is whether these new deals and the petro yuan will put pressure on the $?

I believe the $ has been diluted by QE and that commodities like gold, silver and oil are way underpriced against the buck.  In short $80 a barrel possible not because oil is in short supply but because the $ will be devalued by the markets.

Davidduke2000 Wed, 02/14/2018 - 06:37 Permalink

This pipeline assure Chinese of fuel for their homes and assure the Russian treasury of  $ trillions to come. this pipeline was the result of sanctions that obama the genius imposed on Russia and trump added to them.

Now congress want to add more and make Russia the top super power in the world.