Russia’s multibillion gas deal with China spells trouble for Australia

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Image credit: Flickr User: Mark Turner

The $400 billion gas deal, which Russia and China signed last week in Shanghai, may have serious repercussions for Australia’s major gas export projects that are currently being built in Queensland.

Image credit: Flickr User: Mark Turner
Image credit: Flickr User: Mark Turner

“We can’t afford to underestimate the significance of last week’s development for the Pacific gas market with Russia entering that arena in a major way China,” specialist gas industry consultant Graham Bethune of EnergyQuest said.

“The negative impact for Australia’s [liquefied natural gas] competitiveness and future market share from this new market dynamic is serious.”

The deal between the two superpowers will see Russia supply 38 billion cubic metres of gas to China at an estimated price of US$9.90 per million British thermal unit (MMBTU), which is much cheaper than what Australia charges Japan for the same commodity: US$18 per MMBTU.

“Australia’s LNG sector should be mightily concerned as the project cost for Russia in its China supply deal is about the same cost as our own Gorgon project — but with a capability to supply 80 per cent more gas,” Dr Bethune said.

“This deal has the very real potential therefore to be a game-changer in Australia’s key LNG market. To have any chance of seizing and participating in the next wave of LNG developments, Australia can no longer rely therefore on ‘being first in the queue,'”

Russia has the world’s largest gas reserves and is also the largest gas exporter in the world, with a strong focus on supplying the European market. However, the deal with China indicates that the country is slowly shifting its focus to the Asian markets, threatening Australian gas exporters to take away a piece of their action.

According to the article on The Sydney Morning Herald, EnergyQuest estimates the cost for an Australian greenfield gas export plant to be around US$3500 per tonne of capacity per annum (tpa), while the cost for the recently completed PNG gas export is estimated to be around US$2750/tpa.

“Petronas has quoted a total cost of US$2500/tpa for its Canadian project. The cost of Gazprom’s China project is around US$2000/tpa,” Dr Bethune said.

“In these circumstances, arguing against floating LNG developments in Australia, the cheapest LNG alternative, is irrelevant. It has to be cheapest development or nothing. And floating LNG isn’t an easy get-out-of-jail card either. Costs need to fall — right across the industry.”