Navigant Research Blog

Russia-China Gas Deal Narrows Window for U.S. Exports

Richard Martin — May 30, 2014

Russia and China’s grand bargain on energy, a 30-year, $400 billion deal to pipe natural gas from Russia’s Far East to China, has prompted much commentary on the agreement’s potential to reshape global energy markets and tilt the balance of influence in Ukraine and, more broadly, in Europe.  The deal has “upped the ante for Europeans to diversify their gas imports away from Russia,” said Erica Downs of the Brookings Institution; it means producers of liquefied natural gas (LNG) “may face more competitive markets in Japan and South Korea, which together bought more than half of the world’s supply in 2013,” wrote Chou Hui Hong, a Singapore-based reporter for Bloomberg News; “the implications are potentially huge for Russia, for China and much of Asia, and also for Europe,” declared Keith Johnson, covering all the bases in Foreign Policy.

All the bases, that is, except one: the United States.  The shale gas revolution in the States has led natural gas producers to envision an export boom in which U.S. companies become key suppliers to East Asia while countering Russian influence by shipping large amounts of LNG to Europe.  President Obama said in 2012 that the U.S. is becoming “the Saudia Arabia of natural gas.”

Better Hurry

Indeed, U.S. petroleum exports reached 3.5 million barrels a day in 2013, roughly double the level of 5 years ago, according to the Energy Information Administration.  Proponents of increased LNG exports argue that the gas export boom will bring in billions in profits for American companies, create thousands of high-paying jobs, and reduce the influence of undesirable LNG suppliers, i.e., Vladimir Putin’s Russia.

All of that is, potentially, true.  But there are signals that, even before the Russo-Chinese gas deal, natural gas advocates were overstating the potential market.  And with China building pipelines to ship LNG across Central Asia, the market opportunity is dwindling fast.

The United States has been slow off the mark in building export capacity.  Thirty-one applications for LNG export licenses have been approved since 2011; only seven have been approved, six conditionally.

In 2012, on assignment for Fortune, I visited the Sabine Pass natural gas terminal on Texas’ Gulf Coast.  Built by Cheniere Energy in the 2000s as an import facility, the port had been retooled to load LNG on big tankers for export to Europe and Asia.  Cheniere is the only producer that has won full DOE approval to export gas; and the window for an export boom may already be closing.

The Shrinking Spread

U.S. supremacy in international gas markets depends largely on the wide spread between the cost of producing natural gas in this country and the prices that countries like Japan, South Korea, and Germany are accustomed to paying.  As Karim Rahemtulla, the chief investment strategist at Oil & Energy Daily, points out, that spread narrows rapidly once you liquefy the gas and ship it, via tanker, overseas.

Competition in the international gas markets is bound to heat up, and the United States may have already missed its opportunity for an LNG export bonanza.  Expanding pipelines, more export terminals, and better technology for liquefying and shipping natural gas will all help globalize the natural market, in the way the crude oil market is already globalized.  Already, the relatively low price that China will pay for Russian gas (around $350 per thousand cubic meters, analysts estimate) is putting downward pressure on higher prices for Japan and South Korea.

Earlier this month Dominion Resources won approval from the U.S. Federal Energy Regulatory Commission to build an LNG export facility at Cove Point on Maryland’s Chesapeake Bay.  The company said the $3.8 billion terminal could begin shipping gas as early as 2017.

That could be too late.

One Response to “Russia-China Gas Deal Narrows Window for U.S. Exports”

  1. douglas prince says:

    Here’s an idea – How about selling all that precious gas to the American people instead of tossing it out to the highest bidder overseas?
    Oh, yeah, that’s right. Because Big Oil and Gas doesn’t give a damn about America when it comes to their bottom line.

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