Russian Gas Book Discussed at Brookings

The Brookings Institution hosted an event to discuss a new book from the Oxford (U. K.) Institute for Energy Studies (OIES) entitled: The Russian Gas Matrix: How Markets Are Driving Change. Edited by James Henderson and Simon Pirani, the book is available for £50 through the Oxford website: Click Here.

Henderson was joined on the podium by Jonathan Stern one of the book’s primary contributors. (The event is still available in the C-SPAN archive: Click Here.) Stern, who chairs the OIES Natural Gas Research Program, made some interesting points:

  • “Until the mid-2020s, European buyers are obligated to buy 10 to 15 billion cubic feet per day from Gazprom under international contracts with legally binding arbitration. So all of this discussion about ‘oh how can Europe can break its dependence on Russian natural gas’ [is a bit specious] because if the EU wanted to break these contracts, conservatively it would need to spend between €400 to €600 billion to buy them out… and that simply isn’t going to happen.”
  • With respect to the South Stream pipeline, it has “very very severe regulatory problems in Europe, connected to the fact that the new regulation hasn’t been written… but the intergovernmental agreements and Gazprom’s model for how [South Stream] will work, conflicts with the main principles of the new EU regulation. This is important because if [Russia were to cut off gas transiting through Ukraine], the biggest problems will again all be in southeastern Europe… Bulgaria, Romania, Serbia, and other former Yugoslav republics… [So South Stream] is very important for one aspect of European gas security but a ‘threat’ in relation to other aspects.”

Jim Henderson then took the microphone from Stern and also made several interesting observations:

  • Because there’s now a lot of gas being “produced by Gazprom and the so-called ‘independents,’ [Rosneft and Novatek] we have very competitive markets developing both within Russia and for the export of Russian gas.”
  • “The primary growth in Russian gas output will be in [Eastern Siberia] and that was reflected in the agreement that was signed last week with CNPC [China National Petroleum Corporation]… a deal that was crucial not just for Gazprom but for the Russian political and commercial economy as well.”
  • “We calculate that the break even price of Yamal LNG at the German border is $7.50 to $8.00 per mmbtu, which is competitive with [LNG from any other source].”
  • “In Asia, we believe that the new pipeline and new gas reserves will be able to deliver gas to the Chinese border at around $10.00 to $11.00 per mmbtu which will be very competitive with Central Asian imports and future LNG imports.”

During the discussion period, Charles K. Ebinger, Director of Brookings’ Energy Security Initiative asked what the implications might be for North American LNG producers, to which Henderson replied:

Assuming the [Gazprom-CPNC] deal goes ahead and Gazprom can efficiently develop the required infrastructure, we’re talking about 38-40 [billion cubic meters] bcm of gas per year into a market that will need to be supplied with 400+ bcm of gas by 2020 if [China] meets its current target. So, we’re talking about 10 percent of the market and there will be plenty of room for alternative sources of supply. The Chinese have very deliberately developed a ‘compass’ of supply… and the Russian deal is just the very logical ‘northern axis’ of [that compass]. There’s still plenty of room for other LNG suppliers.

But what it does start to do is to set a benchmark price for potential imports into China… which looks to be about $12 to $13 per mmbtu delivered, which looks pretty similar to what U. S. LNG could be delivered… So, there’s still a gap for volumes but diverging on a price expectation now, which is certainly lower than we’ve seen in the past couple of years at least.”