05/29/14
Nikos Tsafos
Energy, Russia, China
The devil just might be in the details.
No
business agreement in recent times has generated as much excitement,
and as much hyperbole, as the announced deal that Russia would supply
China with 38 billion cubic meters (bcm) of gas annually for a
thirty-year period. The $400-billion deal has been called a victory for
Russia, a victory for China and even evidence of a shift in either
energy markets, or geopolitics or both. Sadly, the deal is none of these
things.
We
do not know the full details of the deal yet, nor do we know whether
all the issues have been resolved—after all, the two sides have long
stressed progress while downplaying their outstanding points. Even so,
the rumored value ($400 billion over thirty years) equates to a gas
price of around $10 per million British thermal units. Given the costs
announced so far, this project will yield a subpar return for Gazprom
under today’s assumptions—maybe high single digits or low double digits.
This will not be Gazprom’s most profitable endeavor.
It
does, however, score it a major political point. Gazprom’s inability to
close this deal has frustrated the Kremlin. Together with Gazprom’s
marketing strategy in Europe, which many criticized, the company’s
privileged position has come under attack. The most visible crack was
the decision last year to allow other Russian companies to export LNG.
Still, the Kremlin is keen to avoid competition that could lower gas
prices overseas. Until last year, this meant Europe.
With this pipeline, Gazprom’s writ is enlarged, as are the complications from a liberalized approach to gas exports.
Read full article
http://nationalinterest.org/feature/the-russia-china-gas-deal-400-billion-mirage-10556
