China's demand for gas to drive Russian exports

China and the rest of emerging Asia need energy resources to fuel their rapid growth. Increasingly, too, they are targeting cleaner energy. According to most of the participants in a discussion at Troika Dialog’s Russia Forum, held in Moscow last week, Russia can be a major supplier of a precious commodity that will suit them well -- gas.

Fatih Birol, chief economist at the International Energy Agency, pointed out that by the end of 2011, the liquid natural gas (LNG) import capacity of China and India will be the same as that of Western Europe. Yet, both nations only started importing LNG in a serious way five years ago.

Russian energy company Gazprom estimates that China’s demand will reach 400 billion cubic metres (bcm) by 2020. Marina Surzhenko, head of LNG export directorate at LLC Gazprom Export, noted that, coincidently, at the end of last year, the Chinese authorities produced the same estimate.

Mark Gyetvay, CFO at Novatek, Russia’s largest independent gas producer, reckons that even this estimate is conservative. In his view, LNG could comprise as much as 20% of China’s energy sources, rather than the consensus forecast of 8% to 10%. Russia, as a low-cost producer, should be perfectly placed to reap the hard currency rewards.

But, Christof Ruehl, group chief economist at BP, played down the lofty predictions, arguing that the implications of the demand growth in emerging markets is not as great as most other panalists make it out to be. Although about 80% of new gas consumption will be in emerging economies, especially China, gas as a source of energy is starting from a low base, making up only 4% of their energy mix. He estimates that about 75% of the new demand in emerging economies will come from Asia, and of that proportion, three-quarters will come from China.

Yet, despite China’s rising consumption over the next decade, per capita use will remain below South Korea, Malaysia and other richer Asian countries. Ruehl also argued that China will want to restrict imports to reduce its energy dependency, and will ramp up its efforts to develop new technologies, in part to replace fossil fuels (such as coal).

Tatiana Mitrova, head of the Centre for International Energy Market Studies at the Energy Research Institute of the Russian Academy of Sciences, took a more phlegmatic and less assertive stance, balancing the bullishness of Gazprom and Novatek with the circumspection of BP.

“It’s up to the Chinese authorities how much LNG the country will import, so that means Russian companies need to be flexible and plan for several scenarios, factoring in a range of between 250bcm and 400bcm,” Mitrova said.

Besides, Russia won’t have it all its own way, argued Tim Lambert, vice-president of Wood Mackenzie's Energy Consulting Group. There are other sources of supply that are increasing, for instance from Australia and Brazil. Equally important, China’s own natural gas reserves are rapidly being developed and tapped. Simply, the supply-side has responded to the pick-up in demand, so the future will be a highly competitive market.

It’s a challenging environment for both suppliers and consumers. Volume and price will be key determinants – as will governments.

“Energy uncertainties in the world today are unprecedented, not least because of confused signals from government policies,” said Birol.

For instance, governments have failed to make climate change resolutions legally binding, and more specifically, China hasn’t yet given a clear signal about how it intends to meet its energy needs. What China decides will have implications for everyone as it increases its per capita consumption.

According to Surzhenko, China is a favoured client. Its government is pragmatic and can focus on the long-term because there are no elections to worry about. China also has the cash to pay for its insatiable appetite.

“One government is simply more important than any other,” concluded Birol.

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