US And Russia May Be Headed For A Gas War In Asia
Asia seems bound for a natural gas shakeup pitting the US against Russia—which could benefit consumers, but also deal a potential hard blow to current and future producers, such as Australia and east Africa.
The trigger for the shakeup is a critical mass of US and Russian gas exports destined for Asia over the coming decade and beyond, much of it likely to be priced at a substantial discount to the liquefied natural gas (LNG) currently on sale in the region.
LNG sold in Japan last month for about $15 per 1,000 cubic feet, and in February, it went for more than $20. But in May, Russia committed to sell 38 billion cubic meters (bcm) of gas per year to China at half that February price—an estimated $10 per 1,000 cubic feet. When US LNG produced from the shale gas boom begins to reach Asia next year, Citi estimates that it will sell for about the same price–$10 to $12 per 1,000 cubic feet.
The US and Russian gas will compete with existing and planned LNG projects around the world toward the end of the decade. According to numbers compiled by Citi, Russia could supply 30 bcm of gas to China by 2020 and as much as 95 bcm to Asia as a whole by 2025. The US is in approximately the same posture—seven export projects in various stages of approval could export 93 bcm of LNG in a similar time frame. The combined potential US and Russian volume is equivalent to more than 3 million barrels of oil a day.
All that would undercut the incumbents
Among the projects whose economics could be challenged are Chevron’s Gorgon and Wheatstone LNG projects offshore from Australia. In a report last year (pdf, slide 32), Goldman Sachs said the two projects require a gas price of $13.50 to $14 per 1,000 cubic feet to break even. Others in possible trouble are east African LNG projects in Mozambique (which need about $11.50 to break even) and Tanzania ($13). Proposed Canadian LNG projects are also at risk of becoming uneconomical. Here is the Goldman chart:
In a note to clients today, Eurasia Group’s Leslie Palti-Guzman said that, as a result of the price impact of the Russia-China deal in particular, new Australian LNG projects are unlikely, and the development of projects in Mozambique and Canada could be delayed.