The implications of this story from China Daily are fascinating on several levels. Firstly, it's worth remembering that China Daily is state-owned and considered as reflecting official policies. Bear that in mind and the implications of this op-ed headline cut away some gas market fundamentals world wide:
It makes sense for China to walk away from gas deal
When the Russian Prime Minister, Vladimir Putin, ended his two-day visit to China two weeks ago, media in China and Russia regretted that the two countries failed to sign the Sino-Russian gas cooperation agreement. But what it shows is that the relationship between the two is maturing, and that cooperation between the two is closer to what might be regarded acceptable international standards.
Under the Sino-Russian gas cooperation agreement Russia would transport 30 billion cubic meters of natural gas from West Siberia to China and 38 billion cubic meters from East Siberia each year. Russia is selling gas to Germany at $400 (288 euros) per thousand cubic meters. Even if Russia settled on a lower price with China, $350, Russia would still be expected to haul in revenue of $23.8 billion a year. If the pipeline can run for 30 years, that would bring in revenue totaling $714 billion.
However, if you use as a guide the long-term agreed purchase price that China gets in the current international liquefied natural gas (LNG) market and the cost of China's unconventional natural gas exploration, buying gas from Russia even at just $250 per thousand cubic meters makes no sense.
The deal is fundamentally flawed, and it is little surprise that the two sides cannot reach an agreement. On gas prices, neither Russia not China can give in. If Russia gives China a lower price, how can it face consumers in Europe? If China accepts a price increase, how would it deal with other natural gas suppliers, particularly Turkmenistan and other Central Asian countries?
And what makes sense? Let's start off by understanding that China knows what many energy "experts" in Europe still haven't figured out:
The US is changing the world through a quiet revolution, one that involves shale gas....Advances in US unconventional natural gas technology directly affect the world's natural gas supply and demand....Russia's desire to sell natural gas to China is born of market pressure. Over the years Russia has treated the resource as a tool to maintain its national strategic interests. It has frequently interrupted gas supply to make its voice heard, making European countries that import the gas feel vulnerable. Gaining energy independence from Russia has become the national energy strategy of such countries.
All good stuff, but the next paragraph shows that China understands Europe's gas markets better than many Europeans do:
Encouraged by the shale gas revolution in the US, European countries are trying to develop all kinds of natural gas. Recently, a huge amount of shale gas and tight sandstone gas was discovered in Germany, Poland and other European countries. Geological reserves in Europe are expected to surpass 120 trillion cubic meters. If its natural gas fields were developed, the end product would cost no more than the gas that Russia now sells to Europe. As in the case of the US, the effects of European energy independence would be felt worldwide.
Considering that the favourite bull story on energy commodities is based on China, this portion on oil, Occupy Wall Street and lesson for Russia, shows that left wing analysis is still alive and well in the Chinese Communist Party:
The recent increase of international oil prices is mainly caused by speculation on Wall Street, not by supply and demand.
Recently US citizens have occupied part of Wall Street, protesting against financial speculators. Therein lies a warning for Wall Street. The price of energy will not surge in the way that it did in 2008. Oil and gas prices will stay relatively low because of the financial crisis, which is the last thing Russia would want to hear.
Another thing that would hardly be music to Russia's ears is the prospect of China becoming energy independent...In fact the country is rich in both conventional and unconventional gases. What brings about a shortage of natural gas in China is a monopoly. Most of the resources are operated by PetroChina. But it has put most of its money into oil exploration, with an eye on rising oil prices. PetroChina complained that the domestic price of natural gas is too low and that things would change if the price was $350 per thousand cubic meters.
China has conventional gas reserves of 56 trillion cubic meters. We also have 100 trillion cubic meters of shale gas, 100 trillion cubic meters of tight sandstone gas, 36.8 trillion cubic meters of coal bed gas, 42 trillion cubic meters of combustible ice on land, 22 trillion cubic meters of combustible ice in the South China Sea, and other natural gases. The total, 356 trillion cubic meters, could help China in the quest for energy independence. If the Chinese government opened the energy market, the domestic supply of natural gas would develop rapidly.
The most interestng disruption here is that China sees realpolitik of gas much more clearly than those who have most to gain from it: European Consumers. If China call the Russian's bluff, why don't we? One reason: people make good money scaring people about insecure and expensive natural gas. This is far more than simple gas bulls. Expensive gas makes nuclear, renewables, CCS, off-shore wind, gas storage(!) and pipelines to nowhere like Nabucco seem if not cheap, then halfway workable. Cheap gas? That would be great for consumers, great for society and completely destroying for most energy models.
