Russia's massive USD 400 billion deal to supply natural gas to China has far reaching global consequences, and it would have a major impact on key liquefied natural gas exporters such as Qatar and Australia.
The deal entails delivery of 38 billion cubic metres of natural gas via pipelines to China, making up roughly 10% of the country's natural gas needs.
It's a "move that opens up a range of geopolitical and market possibilities between Russia and the U.S., China and everyone in-between," said Citibank's Anthony Yuen in a recent note.
It also wipes out a tenth of Chinese demand which could have been supplied by eager LNG exporters.
The deal sets a new price benchmark in the LNG world, as China appears to have snagged a deal valued at USD 10 per million cubic feet, much lower than the USD 14-18 being sold by Qatar in Asia.
"The China gas deal carries other far-reaching implications: China gaining leverage in negotiating gas deals with other overseas exporters; and increased excess global LNG supply as Asia looks to Russia for gas," Citibank said.
Russia is keen to diversify its markets away from Europe, especially as its relationship with the economic bloc has soured due to Moscow's intervention in Ukraine in recent weeks.
"The agreement not only establishes a new gas production centre in East Siberia for Gazprom but provides the company with pipe export growth and market diversity away from its legacy European customers," said Stephen O'Rourke, Global Gas Research Analyst for Wood Mackenzie. "With European gas demand growth uncertain and the Ukraine crisis leading to calls for Europe to reduce its reliance on Russian gas, Gazprom now needs a 'new Europe'- enter China."
Woodmac believes the favourable pricing means the deal could signal further gas sales of Russian gas to China from Gazprom and other Russian companies, further undercutting other LNG exporters.
QATAR'S KEY MARKET
Qatar is the world's largest LNG exporter, but it is widely expected to be displaced by Australia around 2020. By then a number of Australia's offshore capacity projects are expected to come on stream taking its production to 85 million tonnes, compared to Qatar's 77 million tonnes.
With Qatar exercising self-restraint with a moratorium on new gas exploration till at least the end of this year, any new production is likely to be a few years away.
In any case, the natural gas export market is getting increasingly crowded as new export players United States, Canada, and East Africa join Russia and Norway in the race to supply natural gas to the world.
For now it's a two-horse race between Russia and Qatar, and the two largest natural gas exporters seem to be swapping customers at the moment.
As Europeans looks to slowly wean themselves off Russian natural gas, Qatar is expected to supply an extra 6.64 million metric tons to Europe in 2014 in addition to the 19.65 million contracted into the region this year - its biggest export volume to the economic bloc ever.
Lithuania, which is fully dependent on Russia's state-owned Gazprom for its natural gas, said on May 28 that it is in negotiations with Qatar for nearly 0.54-billion cubic metres per year for five years. The Qataris have reportedly offered better pricing than Gazprom's offer, according to local media reports.
On the same day, Germany's E.ON SE company signed a flexible three-year contract with Qatargas to receive 2 billion cubic metres of natural gas.
"E.ON regards Qatar as a priority country in the expansion of the company's LNG business model, including short and long-term supply agreements," the company said in a statement.
JAPANESE LNG
While Qatar is homing on incremental markets where fresh Gazprom supplies are unwelcome, Russia appears poised to make greater progress in the fast-growing market of Asia, where Doha annually ships 63% of its LNG exports.
As many as thirty-eight Japanese lawmakers said they are going to lobby Japnese Prime Minister Shinzo Abe to revive an old natural gas pipeline project linking Russia to Japan. The project could deliver as much as 20 billion cubic metres of natural gas (or 15 million tonnes of LNG) - or roughly a fifth of Japan's LNG imports last year.
Japan is the world's biggest LNG importer and a push to finalise the pipeline project could open the door to fresh investments in Russia natural gas reserves, estimated to be the largest in the world.
At the moment, Russians seem to be winning the race to get to markets with the China deal seen as a major coup for Vladimir Putin.
"The deal will have profound impacts on multiple fronts including political relationships among China, Russia, Europe and the US, domestic gas market in China, and LNG market in Asia," said Clint Oswald, an analyst with Bernstein Research.
The Qataris will be taking note as they mull their next move.
The feature was produced by alifarabia.com exclusively for zawya.com.
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