Moving East Or Moving West: What Happens Next In The Gas World?
Chatham House is presenting 'Rebalancing the World Energy Markets: The role of China, Russia and Central Asia. The two-day conference will examine China, Russia and Central Asia’s demand drivers, assess the impact of unconventional energy sources, and discuss the feasibility of developing new fields in the context of oil and gas transport options.
In advance of the confeence, Natural Gas Europe was pleased to have the opportunity to interview Dr. Keun-Wook Paik, Associate Fellow, Energy, Environment and Resources Programme, Chatham House & Senior Research Fellow, Oxford Institute for Energy Studies (OIES). Dr.Paik is the author of the recentlly published work Sino-Russian Oil and Gas Cooperation: The Reality and Implications.
1. Russia is interested in diversifying its customer base, therefore reducing its dependency on the European market. By 2030, the Russian government plans to increase exports to Asian countries such as China, South Korea, and Japan until they make up 19%-20% of the total. So if Asia seems to be of importance for Russia, how important is Russia for Asia, and for China in particular?
Asia is and will be very important to Russia, but Russia is still a long way off to be an integral part of Asia. To this day, Russia fails to understand Asian way of thinking and it will take it a long time to be accepted as genuine part of Asia, even though Sino-Russian trading scale already reached US$ 80 bn /y, aiming at us$ 200 billion by 2020. China, having agreed to open its oil market to Russia, is desperate to secure a reliable crude supply source. However, China did not take the same stance towards overall general trade with Russia. China’s stance towards Russia indirectly tells the difficulty of penetrating Asian market.
Are we likely to see a diversification in Russia's export market, or will Russia remain, at least in the near future, dependent on the European market?
Russia is playing an important role in supplying a sizable crude oil to China, but despite many years negotiation on the price issue, no gas is being supplied to China via apipeline. Until a breakthrough on gas price, Russia will remain dependent on European demand.
Also, if Russia was to be successful in its exports diversification strategy, what would be the impact on the European gas market ?
If Russia can strike a gas supply deal with China based on the Altai gas export route, the impact will not be small as it will make Russia a SWING SUPPLIER between European and Asian gas market. It could be a unique and rather special status for Russia to enjoy. However, it could be a nightmarish situation for European gas consumers as Gazprom might not be willing to compromise on its gas supply price.
2.Turkmenistan and China have engaged in a successful cooperation, and by 2020 China plans to import 60bcm of Turkmen gas. Can we understand that Turkmen gas actually pave the way for Russia to export its gas to China ; or does Russia find itself challenged both in its export diversification strategy and in its « privileged zone of influence » ?
The latter is accurate. The agreement of 65 bcm/y of gas supply from Turkmenistan to China (the total from Turkmenistan, Uzbekistan and Kazakstan is in the region of 100 bcm/y),increased from 40 bcm/y, confirmed the size of gas market available in China if a mutually acceptable gas supply deal is made. It has deprived Russia of its conventional role as the only gas export market provider for Turkmenistan. China has offered a timely export market for Turkmenistan based on equity gas option and consequently Russia’s dominance of the region’s gas marketis greatly diminished.
3. On the western side, the European Union is trying to diversify its natural gas imports basket, in particular by seeking natural gas supplies from Central Asia via various natural gas pipeline projects. In the case of the TransCapian gas pipeline, building such an infrastructure that runs undersea and crosses a zone of unresolved conflict (dispuste over sovereigny over the Kyapaz/Serdar gas field in the Caspian Sea between Turkmenistran and Azerbaijan) increases the economic and political risk of the project. So, what are the probability for the TransCaspian pipeline project to materialize in the near future ?
It may take more time as there are too many players, but the pipeline project needs a linchpin major player who would be able to play a similar role to China.
More generally, do you see the European Union becoming a player of importance in Central Asia, please explain?
EU has a huge interest in playing an important role in developing a new gas pipeline from Central Asian Republics as it will give it some leverage vis a vis Russia. However, the current economic downturn in EU will serve as a real hurdle to make a massive investment in this type of very large infrastructure development.
4. Uzbekistan is a producing country with apparently enough gas reserves to become a « potential supplier of some gas to Europe if its infrasturcture development starts to look westward » (13/03/12-Congressional Research Service, R42405). Though, as in the case of Turmkmenistan, its infrastructure is developing eastward. What makes the european market so « unattractive » compared to the Asian market, Chinese market in particular ? What are the implications of this move toward east ?
Like Turkmensitan, China offered a sizeable export market for Uzbekistan. To accommodate a very large scale gas import via a pipeline, Chinese government has decided to develop the West-East Gas (WEP) V. Immediately after the completion of WEP II, Beijing took steps to initiate WEP III. However, details of WEP IV and V are not yet available. Once the WEP II, III, IV and V are completed, China will be able to deliver as much as 120 bcm/y of pipeline gas from Central Asian Republics to its eastern coastal areas. As the European Union cannot offer such massive market to the Central Asian Republics, it makes sense for China to pursue the gas field development with the gas option equity.
5.China is interested in developing its own unconventional gas resources. Is the competition fair between Chinese players and foreign players interested in exporting to China?
Generally speaking, China was - and is - very slow in opening their exploration acreage to western companies. Beijing authorities confirmed that western companies will be invited in the bidding rounds for shale gas exploration and development in China. At this stage there is no reason for Chinese players to take advantage of the bidding rounds as the unfair competition will dissuade western investors possessing advanced technology and know-how on shale gas exploration to take part in the bidding process.
Can Chinese unconventional gas development be a threat to cooperation with Russia? .
It is too early to say whether China’s call to accelerate shale gas development will repeat the US shale gas revolution by 2020. It will take time to understand the different geological characteristics of shale gas bases in China and the different development environment. In particular, water supply shortage will be a serious obstacle. We may not be able to assess the extent of China’s shale gas expansion until around 2018-2020, but for China to achieve the target of up to 80 bcm/y by 2020 is far too ambitious. If China’s shale gas production can reach 20-30 bcm/y by 2020, it will be a very good performance which will lay grounds for expansion in the 2020s.
It is worth noting that event if China fails to achieve its target production of unconventional gas by 2020, there is no guarantee that the situation will open doors to Russia’s gas export to China. China is developing a back-up plan to cope with the situation of modest success of its unconventional gas development. Undoubtedly, LNG supply will play much bigger role but question is whether Russia’s LNG from Vladivostok can compete against the LNG supply from shale gas LNG supplies from the US and Canada, and East Africa.
Russia had a tendency to under-estimate the role of shale gas revolution in the US but is beginning to recognise its impact on the global gas trading in the near future. Regardless of success of China’s unconventional gas development, Russia will have to struggle to compete against many LNG supply sources around 2018-2020 period. Without the option of pipeline gas export to China, Russia’s Asia gas export based on LNG will have a very difficult time to penetrate the huge market
Yasmina Sahraoui
'Rebalancing the World Energy Markets: The role of China, Russia and Central Asia, will be held on 29-30 November 2012