China Russia Gas Deal: Will Fuel Prices Soar?

What consumers should know about the China Russia gas deal

This week, Russia cemented a $400-billion, 30-year deal to provide China with natural gas as of 2018.

According to trade critics, the move is a Russian message to the West, indicating they have other customers for their natural resources and do not need to rely on European demand to survive economically.

The supply of natural gas from Russia to Europe has been the sticking point since tensions in Ukraine escalated last year. But what does this deal mean for Canada, the fourth largest supplier of natural gas in the world? Should suppliers – and consumers – here be concerned?

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China’s Huge Energy Appetite

China is the world’s most populous country and has a rapidly-growing economy. The U.S. Energy Information Administration says this has “led it to be the largest energy consumer and producer in the world. Rapidly increasing energy demand, especially for liquid fuels, has made China extremely influential in world energy markets.”

China is expected to surpass the U.S. in consumption of natural gas. In only four years, Chinese natural gas imports grew from 4.5 billion cubic metres to 41 billion cubic metres, during which consumption has doubled. This growth pattern is expected to continue, and the deal between China and Russia will have an impact on natural gas prices around the world

Russia to Supply Only Part of China’s Gas Demand

China consumes almost 150 billion cubic metres of natural gas every year. The Russian deal is massive – one of the largest in history – but it will only make up 25 per cent (38 billion cubic metres) of what China needs. With more than 1 billion residents, their natural gas requirements cannot be satisfied by only one supplier.

China itself is also a major producer of natural gas at 107 billion cubic metres a year. The deal’s purpose is to keep up with China’s growing demand and to ease its reliance on coal, still a heavily-used major resource in the nation. China is under global pressure  to move to a cleaner energy solution and away from heavy polluters like coal.

The Canadian Impact

The U.S. is Canada’s biggest natural gas customer and the Russia-China deal should have no impact on that relationship. But overall global prices could be affected depending on what price Russia and China settle on. The Toronto Stock Exchange is a resource-heavy index and sharp increases in resource prices can create wild swings on the market. Investors looking to invest are already aware of the cyclical nature of natural gas prices, which are cheaper in the summer months and more expensive in the winter months.

A Reprieve for Russia

This deal gives the Russian economy some breathing room. Since tensions in Ukraine began in late 2013, the West has threatened to stop Russian natural gas flowing into Europe by ramping up U.S. production.  Deputy Head of the Russian Diplomatic Academy under the country’s Foreign Ministry, quoted by the RIA Novosti news agency says, “we will be able to show to Europe that we have other customers.”

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