China's natural gas demand has been growing as the government seeks to move away from coal in favor of cleaner fuels. According to EIA's International Energy Outlook 2013 (IEO2013) Reference case, demand will more than triple from 5.2 trillion ft3 in 2012 to 17.5 trillion ft3 by 2040.
Gazprom, the largest natural gas producer in Russia, finalised a 30-year natural gas supply deal with the Chinese National Petroleum Corporation (CNPC) in May. Under the first phase of the contract, Russia will supply China with 38 billion m3 (1.3 trillion ft3) per year of natural gas starting in 2018. Future phases could increase this volume to as much as 60 billion m3 (2.1 trillion ft3) per year. The contract links the natural gas price to international crude oil prices and operates as a take-or-pay scheme: the buyer, CNPC, must pay for the contracted natural gas even if it decides not to receive it.
Source: US Energy Information Administration, International Energy Outlook 2013, IHS Energy, Eastern Bloc Research Note: Volumes shown for Russia-China gas deal assume minimal contract obligations. Increases in these volumes will lessen the amount needed from LNG imports and other contracts.
New natural gas production in Russia will be sourced predominantly from fields in eastern Siberia, which currently lack export infrastructure. The planned Power of Siberia pipeline will export gas south to China and east to an LNG plant on Russia's east coast.
This contract is Gazprom's largest to date. Gazprom has a monopoly on pipeline natural gas export contracts made by Russia. The situation differs from that in LNG markets, where other companies such as Rosneft and Novatek may participate.
China's northern and eastern provinces have a growing natural gas demand that cannot be met by existing pipelines or LNG, and piped Russian natural gas will mostly go to satisfy demand in these regions. China has also committed to purchasing 38 billion m3 (1.3 trillion ft3) per year of natural gas from Turkmenistan by 2016, increasing to 65 billion m3 (2.2 trillion ft3) per year by 2020.
Although China continues to import more LNG, the government is committed to expanding Chinese domestic production, which is expected to increase from 4 trillion ft3 in 2012 to 10 trillion ft3 by 2040 in the IEO2013 Reference case.
Developing China's shale gas reserves is also an important part of the government's natural gas strategy. According to EIA's assessment of world shale gas resources, China has 1115 trillion ft3 of technically recoverable shale gas. New production along with imports of LNG will meet rising demand in China's eastern and southern coastal regions.
Source: US Energy Information Administration, IHS Energy, Eastern Bloc Research
Adapted from press release by Ted Monroe
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