BLOOMBERG

 

Russia-China Natural Gas Deal to Set LNG Price Floor, BofA Says
By Isis Almeida - May 27, 2014

 

Russia’s deal to sell natural gas to China after a decade of talks will set a floor for prices of the
liquefied fuel as the Asian nation is set to become the world’s leading consumer, according to
Bank of America Corp.


The 30-year accord for 38 billion cubic meters a year (3.8 billion cubic feet a day) of supplies
from 2018 by pipeline from eastern Siberia was probably reached at a price of $10.50 to $11 per
million British thermal units, the bank said in a report e-mailed today. China, which consumes
about half of the world’s coal, copper and iron ore and 4 percent of its gas, is set to become the
biggest gas user by 2035.


The deal “establishes possibly the most important gas benchmark in decades,” said Francisco
Blanch, the bank’s global head of commodities research. “If liquefied natural gas prices were to
fall below Russian import parity levels several years into the future, the Chinese market would
probably absorb them rather easily.”


Global gas markets will probably converge to the Russian export price into China, with spot
Asian LNG cargoes likely from the Chinese floor of $11 per million Btu to the Japanese ceiling
of about $16 per million Btu, the bank said. LNG supplies may rise by 18 billion cubic feet a day
by 2020 to 43 billion cubic feet a day, an amount that can be “relatively easy” to absorb by
emerging markets such as China, the bank said.


The Russia-China agreement will also set a long-term price floor of $4 per million Btu for U.S.
gas as regasification, liquefaction and transport costs of as much as $7 per million Btu from the
U.S. to Asia become a “key component” of Henry Hub pricing, Bank of America said. Demand
from Asia will likely keep western Europe gas prices well bid, it added.


“Potential markets that could tap America’s heavily discounted natural gas prices include both
Europe and Asia,” Blanch said. “With Chinese demand now set to grow meaningfully over the
coming years, we see European gas prices holding up relatively well and being floored by this
new gas pricing structure in China.”


To contact the reporter on this story: Isis Almeida in London at ialmeida3@bloomberg.net
To contact the editors responsible for this story: Lars Paulsson at lpaulsson@bloomberg.net Rob
Verdonck, Bruce Stanley
®2014 BLOOMBERG L.P. ALL RIGHTS RESERVED.


FUTURES AND OPTIONS TRADING INVOLVE SIGNIFICANT RISK OF LOSS AND MAY NOT BE SUITABLE
FOR EVERYONE. OPTIONS, CASH AND FUTURES MARKETS ARE SEPARATE AND DISTINCT AND DO NOT
NECESSARILY RESPOND IN THE SAME WAY TO SIMILAR MARKETS STIMULUS. A MOVEMENT IN THE
CASH MARKET WOULD NOT NECESSARILY MOVE IN TANDEM WITH THE RELATED FUTURES & OPTIONS
CONTRACT BEING OFFERED. SEASONAL DEMAND AND CURRENT NEWS IN COMMODITIES ARE
ALREADY REFLECTED IN THE PRICE OF THE UNDERLYING FUTURES.