25 February 2020
China and Russia inked a landmark natural gas deal in May after two-decade-long negotiations. Photo:
China and Russia inked a landmark natural gas deal in May after two-decade-long negotiations. Photo:

Russian gas: What it will bring to China

With China’s air getting filthier by the day thanks to excessive coal-burning by power plants and some other industries, authorities have been scrambling for alternative energy sources. Against this backdrop, natural gas has been seen as a good solution to improve the nation’s energy-mix.

There is indeed a strong case for natural gas as the clean fuel can help bring down emissions. That said, there is this inconvenient truth: China is not blessed with substantial natural gas deposits. Thus, the nation has to seek imports, particularly from neighboring Russia.

In May, China and Russia finally wrapped up decades-long talks and inked a landmark contract on natural gas supply. In an agreement signed in Shanghai during a visit of Russian leader Vladimir Putin, officials inked a US$400 billion deal that will help quench China’s energy thirst. Under the plan, Russia will supply gas to China for a period of 30 years starting from 2018.

The deal came as the world’s second largest economy currently has no viable options other than natural gas to meet its energy demand and at the same time minimize the environmental impact.

Zhang Guobao, former director of the National Energy Administration, once noted that the cost of hydroelectricity is soaring as half the investment on a project goes toward relocation of affected residents. Meanwhile, solar energy relies too much on subsidies.

As for building more nuclear power plants, authorities may run into opposition from the public amid safety fears. Also, China is yet to master some core technologies.

More abundant gas supply is definitely key to the Chinese pollution fight. Among other things, the mega Russian gas deal may accelerate Beijing’s initiatives to replace coal for heating as well as for electricity generation.

Xinhua reported at the end of last year that the scheme to replace coal with natural gas at power plants was partially halted in a number of northern provinces so as to ensure gas supply to residents during the winter season.

Evan Li, head of power, utilities, renewables and environment at Standard Chartered, told EJ Insight’s parent publication Hong Kong Economic Journal that related equipment suppliers and contractors are likely to enjoy a bonanza in the next couple of years as more power plants switch to natural gas.

Yet, he warns that end-users may have to pay more as the cost of electricity generation using natural gas can be as high as 0.9 yuan per kWh as compared to 0.3 yuan per kWh for traditional electricity generation. Thus, government subsidies are central to promote the clean energy.

Li notes that higher tariff is a worthwhile option as officials and consumers ponder over the even higher cost of tackling environmental problems.

China National Petroleum Corp. (CNPC) is tipped to be another major beneficiary of the China-Russia deal.

Almost one third of China’s natural gas consumed in 2013 was from overseas, and CNPC accounted for more than half of related imports with a total of 28 billion cubic meters last year.

Yet, despite the buoyant market demand, CNPC lost 105.1 billion yuan (US$17.04 billion) from the gas import business during 2011-2013. Analysts say the staggering loss has forced CNPC to trim importation, further exacerbating the gas shortage on the domestic market.

Although China and Russia didn’t disclose details, the Russian gas price for China is expected to be cheaper than that for the European market, which would be great news for CNPC. Under the agreement, Russia’s supply will leapfrog from 5 billion cubic meters a year in 2018 to 38 billion cubic meters in 2023.

According to Simon Powell of CLSA Asia-Pacific Markets, the average unit price for China to buy the gas may only be US$9.5-10 per cubic feet, lower than the average US$11.3 per cubic feet that Europe pays for Russian gas.

The brokerage points out in a report that CNPC’s net loss on gas importation can be trimmed from 1.2 yuan per cubic meter to less than 0.2 yuan with the Russian deal.

On top of that, China’s ongoing pricing reforms to boost the baseline natural gas price will improve the prospects for CNPC’s own gas unit.

– Contact the writer at [email protected]


China-Russia energy alliance is based on mutual needs. Photo: Xinhua

EJ Insight writer