After a decade of negotiations, Russia signed a landmark gas agreement with China worth of $400 billion. Russia will start supplying gas to China from 2018 for the next 30 years. Russia originally wanted China to pay the same price as Europe does for gas, at $380.50 per thousand cubic meters but Chinese appeared as hard bargain.
The deal could be a game-changer for the global energy market especially for LNG market. Pressure will be mounted, particularly on countries like Australia and Canada; their bids to be early to the LNG market have been eclipsed by Russia.
Currently in Australia seven LNG projects are under construction which will be completed by the end of this decade. Australian LNG projects are already facing the cost overruns, which makes them 45 percent more expensive than Russian gas when their production will come online. So if the prices of LNG retreat the bottom-line of Australian LNG projects will severely hit.
USA is also facing the heat of Russia-China gas agreement. DOE has also escalated the approval process of LNG projects.
There seems to be an oversupply of LNG by the end of this decade. The Russian gas deal is equivalent to 29 million tons a year of LNG, which is more than Australia’s entire current output, and which represents around a quarter of China’s current gas demand. The deal is likely to pull down LNG prices and put developers of new gas fields under pressure to cut costs or cancel projects.
The planned pipeline infrastructure may support up to 60 billion cubic meters over time which means further LNG demand might erode.
Despite the fact that Russia didn’t get the price they wanted from the Chinese, the deal has put Russia in driving seat of gas market.