News & Updates

Russia-China Gas Deal - Why It Matters and What it Means for Canada

May 30, 2014

After more than a decade of negotiations, China and Russia have agreed to a natural gas deal worth about $400 billion that represents a major step not only in global energy markets but also in geopolitics.

The deal will spark development of massive gas fields in Eastern Siberia and the construction of some 4,000 kilometres of pipelines, efforts that together are expected to cost $55-billion (US).

 

Despite the size and scope of the deal—it will last for 30 years and require Russia to eventually deliver 38 billion cubic meters of natural gas per year, according to a post China National Petroleum's website—it may not have a significant short-term financial effect.

Still, the deal signals changes for several key global issues, not just energy. 

Although the exact pricing of the deal has not been disclosed, most analysts have been anticipating its details for some time. Some of those analysts have pegged the value of the deal at around $400 billion. Renaissance Capital analyst Ildar Davletshin wrote in a Wednesday note that he estimates "a limited financial impact" on the valuation of Russia's Gazprom. In fact, he writes that if total exports to China remain at 38 billion cubic meters, then construction on a natural gas pipeline to China may actually decrease the company's overall value.

Keith Crane, director of RAND Environment, Energy, and Economic Development Program, said he agrees that the deal doesn't change anything for either party in the short term, especially as the price remains undisclosed.

 

Some much needed investment capital

Still, Crane said that the ultimate legacy of the deal may be that it will give Gazprom a badly needed source of investment capital. While this will largely finance the pipeline to China—the company is responsible for all infrastructure on its side, and the Chinese will handle construction in their own country—Gazprom is also involved in other projects. Among them is the planned "South Stream" pipeline through the Black Sea, which he said could see some benefit from added liquidity.

 

Impact on natural gas markets

Once the natural gas pipeline to China is completed, Crane said, the global gas markets will become more integrated. According to economic theory, greater integration brings greater price efficiency, so the direct connection of East and West markets should theoretically herald better market conditions. Integration has been a trend in the market for some time through liquefied natural gas, he explained, but there is no better way than a direct pipeline to make this change.

 

Boost for Putin at "Russia's Davos," and a June meeting with Obama

Although Gazprom may not see short-term benefit from the deal, at least one man in Russia will reap immediate gains. At the St. Petersburg International Economic Forum, which began Thursday, Putin will be able to boast to his country's economic elite at "Russia's Davos" that their nation remains enticing for foreign investment, said Lauren Goodrich, senior Eurasia analyst at geopolitical intelligence firm Stratfor.

"It will be [Putin] riding high, not only this deal, but a string of very large deals with China," Goodrich said. "[He'll say] 'The West keeps on saying that we're bad for investment, but we have a lot of investment coming in.'"

When Putin meets with President Barack Obama and German Chancellor Angela Merkel at a World War II commemorative event on June 6, he'll also be able to flaunt this $400 billion deal as a sign that his country is not at the mercy of Western sanctions, Goodrich said. The ability to demonstrate financial security in the face of continued threat of sanctions was essential for the Russian leader, she said.

"Putin had to get this deal done today, period," Goodrich said.

 

Russian-European trade dynamic

In addition to allowing Putin to take a stronger stance against Merkel and Obama, the deal will also affect the nature of Russia and Europe's energy trade, experts say. In essence, Crane said, Gazprom was facing a monopsony, or a single buyer, in the European Union: It sent over 80 percent of its natural gas exports westward, according to Stratfor, while European consumers benefit from an increasing variety of gas options.

"It is important for Gazprom to get outlets for its gas, if it alienates Europe much more. Plus, it has a need for a bigger market," Malcolm Graham-Wood, founding partner at energy consultancy HydroCarbon Capital, told CNBC.

Goodrich said the deal will not only give Russia more options, but force its European customers to "at least keep decent relations with Russia on the energy front," lest Gazprom divert more of its supply to the East.

The deal is a message from Mr. Putin to Europe to “do your worst. We are not reliant on your friendship. If you want to apply sanctions and behave unreasonably to us, we will turn to our good buddy the Chinese,” said Bobo Lo, a British academic who has spent decades studying Russia’s foreign policies and geopolitics.

Or, as Russian parliamentarian Alexei Pushkov put it in a tweet, U.S. President Barack “Obama should abandon the policy of isolating Russia: it will not work.”

 

Russia's new approach to China

While "Russia has historically shunned China," this deal represents a turning point in Sino-Russian relations, Goodrich said—not necessarily making them political allies, but at least making them significant economic partners. She said that Russia has had a "historical nervousness of having China inside the country," but sanctions from the West have forced that to change in a "big, big way."

Now China will not only have an energy partnership with Russia, but Beijing is also in talks to acquire a stake in Gazprom's Vladivostok liquefied natural gas terminal and a 19 percent stake in Russian oil company Rosneft, according to Stratfor.

 

China's important stake in Russia

As Russia sees a new economic partner in China, Beijing has found an investment in the future of its neighbor. It is tough to make any firm predictions, but this new stake may give China some leverage inside of Russia, Goodrich said. Still, this will mostly be relegated to economic sway, not direct political clout, she added.

 

'So much more secure'

Perhaps more important for Beijing than a stake in Russia is the promise of greater energy security gained by the deal. The Chinese energy market is "incredibly vulnerable" to the situation at sea, Goodrich said. Recent tensions in the South China Sea, in which China unilaterally began drilling near islands claimed by Vietnam, only underscore how important it is for Beijing to secure more land import options, she said. China, she added, becomes "so much more secure" with the added diversification of its energy supply. But beyond the source of the gas, the Gazprom deal helps China address its rising energy consumption.

"It makes sense for China to sign up for as much reasonably priced gas it can," Graham-Wood said.

 

China's battle with pollution

China faces a significant uphill battle in terms of pollution, but an increase in natural gas can only help, Crane said. As Beijing seeks to close more coal power plants it hopes to meet the population's consumption needs with natural gas, he added, explaining that this switch "could have a pretty significant impact" on air quality.

 

Russia's entrance into East Asia

While modern Russia has long made overtures to East Asia, the construction of a Gazprom-connected pipeline into China will give Moscow a physical stake in the region, Goodrich said. And once the project is completed, Russia can begin to look to other countries for partners—or rivals.

"Russia can start playing these countries off each other," Goodrich said. "And this will create a fun new dynamic because this will be the first time we'll be able to see Russia play around again in East Asia."

 

Impact on Canada

Under the deal, China agrees with a single stroke to buy from Russia’s OAO Gazprom nearly half the volume of natural gas consumed by all of Canada.

And for Canada, that new source of natural gas is another sign that its own ambition to become a major exporter of the commodity faces intensifying global competition. Energy companies are planning several liquefied natural gas export projects on the British Columbia coast, but Canada is well behind other international players.

B.C. Premier Christy Clark insisted the province is still well-positioned to become an LNG exporter. She said Asian buyers, including China, still want their suppliers to include countries that offer reliability over the long term.

“We’ve certainly seen the way that Russia likes to do business these days, and we certainly know that the Chinese want a dependability of supply. We can supply that,” Ms. Clark said at a Vancouver news conference on Wednesday. “Being honourable, being trustworthy, providing the assurance that we are not going to play politics with energy. I think that’s worth a lot to our potential customers out there, especially for China.”

Shamsul Azhar Abbas, the chief executive officer of Malaysia’s state-owned Petronas, also played down the impact of the Russia-China natural gas deal on Canada’s fledgling LNG industry, and specifically the Petronas-led Pacific NorthWest project.

“What I am interested in is whether it will compete directly with our Canadian project, and the answer is no. The beautiful part of our project is that we have a buyers’ consortium,” Mr. Shamsul said during an interview at an international LNG conference in Vancouver.

The Pacific NorthWest LNG joint venture is being planned for Lelu Island, near Prince Rupert in northwestern British Columbia. “As far as China is concerned, they have a very huge need for energy,” Mr. Shamsul said.

Russia and China expect the first gas to flow in four to six years. Although financial terms were not disclosed, China is expected to pay about $20-billion up front toward the enormous cost of building pipelines that will deliver gas to Beijing, and further south to the Yangtze River area.

Gazprom expects to sell the gas for about $350 per thousand tons, or $9.91 per thousand cubic feet. While that is far above prices in North America, where gas has lately traded for around $4.50, it’s well below the pricing for Pacific liquefied natural gas.

The more important question for global energy markets involves the deal’s influence on the way gas is moved on ships. For Australia, Mozambique, the United States and Canada, China has held promise as a lucrative new market for sea-borne liquefied natural gas. The pipeline from Russia is the “least-cost trade pathway,” meaning it is cheaper than any other potential source of imports for China, said Kenneth B. Medlock III, senior director at the Center for Energy Studies at Rice University in Houston, which has developed a global model of the natural gas trade.

(That gas will be worth $10.50 to $11 by the time it reaches Shanghai, Mr. Medlock said, which slightly reduces its pricing advantage.)

Meanwhile, Russia is looking to quickly seize LNG market share as well. The development of the Eastern Siberian gas fields will allow Russia to tap additional supplies that can be exported onto tankers through the Pacific port at Vladivostok. And China, in a separate deal, agreed to buy a smaller volume of LNG from the Yamal project, which will help support construction of that undertaking in Russia’s Arctic.

The combined effect stands to disrupt LNG markets as Russia elbows in with large new supplies. That places new pressure on countries like Canada, whose bid to be early to market has been eclipsed by Russia.

The earliest discussions of LNG shipments from Canada’s West Coast pointed to a potential bonanza, with Asian prices far higher than those in North America. And although rising natural gas demand means the Asian market remains for the taking, the Russian deal underlines the need for Canada to think differently about exporting to the Pacific, said Peter Tertzakian, chief energy economist at ARC Financial Corp. in Calgary.

“The trick for Canada is to make sure we get to market with a good, low-cost product,” he said. “Because there’s no point in getting to market only to find out you’re the high-cost producer.”

 

 

Adapted from:

Rosenfeld, Everett. "Why the Russia-China Gas Deal Matters." CNBC.com., 22 May 2014. Web. 30 May 2014. <http://www.cnbc.com/id/101693525>

Vanderklippe, Nathan, and Brent Jang. "Massive Russia-China Gas Deal to Shake up LNG Markets." The Globe and Mail., 22 May 2014. Web. 30 May 2014. <http://www.theglobeandmail.com/report-on-business/international-business/asian-pacific-business/massive-russia-china-gas-deal-to-shake-up-lng-markets/article18783872/>

‘Not one drop of poisoned water’

May 20, 2014

In a new book about hydraulic fracturing, Ezra Levant refutes environmentalist claims about damage done while accessing fossil fuels miles below the ground.

All the anti-fracking hype is designed to make you believe that the U.S. government has been asleep at the switch when it comes to monitoring environmental safety. The activists want you to believe that a film director named Josh Fox can grab a video camera and, within a few months of driving around the country, easily expose a catalogue of hazards that all the experienced and educated scientists at the U.S. Environmental Protection Agency (EPA), not to mention all the state regulators, missed.

Fox even implies that U.S. President Barack Obama has been naively misled on the issue by the dastardly oil and gas industry. In July 2013, Fox wrote an open letter to Obama, in which he reminds the president how frequently he’s met with industry representatives. He implores the president to meet with him and seven families who “have all had their lives ruined” by fracking.“We seek to discuss with you the dark side of fracking, a perspective that has not yet been presented to you with adequate weight or emphasis,” he writes. Of course, if anyone knows just how informed the president of the United States is, it must be a crusading New York City filmmaker.

The Environmental Protection Agency has found no proven cases of fracking-related contamination. Exactly zero. Not a single one, anywhere, ever

But the Obama administration has proven itself to be no booster of the fossil-fuel industry, and under Obama, the EPA has been no sleeping watchdog. In reality, they have been active and invasive, particularly when it comes to fossil fuels.

The track record of Obama and his EPA, in other words, is one of acute, often even baseless, precaution. Which is important to keep in mind when you read the EPA’s definitive review of fracking and its potential for contaminating groundwater. That is, they have found no proven cases of fracking-related contamination. Exactly zero. Not a single one, anywhere, ever.

“In no case have we made a definitive determination that the fracking process has caused chemicals to enter groundwater,” Lisa Jackson, then head of the EPA, told a reporter in 2012.

And the EPA has been on top of this issue for years, long before Josh Fox and his fashionable anti-fracking celebrity movement came on the scene. In 2004, the EPA released a study representing four years’ worth of the agency’s research into the safety and environmental effects of fracking. It “reviewed incidents of drinking water well contamination believed to be associated with hydraulic fracturing and found no confirmed cases that are linked to fracturing fluid injection into coalbed methane wells or subsequent underground movement of fracturing fluids.” It concluded, “The injection of hydraulic fracturing fluids into coalbed methane wells poses little or no threat to USDWs [underground sources of drinking water].” The study was sufficiently exhaustive, the EPA determined, that it did “not justify additional study at this time.”

The EPA’s long-term research and scientific evidence is the sort of thing that President Obama would rely upon in continuing to allow fracking. And it isn’t just the EPA proving it. On the state level, too, over and over again, these tales of contaminated groundwater have been found to simply have nothing to do with fracking. When Alabama regulators reviewed fracking activity in their state, they came up with the same result: “There have been no documented cases of drinking water contamination that have resulted from hydraulic fracturing operations to stimulate oil and gas wells in the State of Alabama.”Researchers came up with the same goose egg in Alaska: “There have been no verified cases of harm to ground water in the State of Alaska as a result of hydraulic fracturing.” And in Colorado, “no verified instance of harm to groundwater caused by hydraulic fracturing.” And “no instances” were identified in Indiana “that harm to groundwater has ever been found to be the result of hydraulic fracturing.” Kentucky looked into complaints from landowners about contaminated groundwater but the results were predictable. “In Kentucky, there have been alleged contaminations from citizen complaints but nothing that can be substantiated.” In Louisiana, regulators,too, are “unaware of any instance of harm to groundwater … caused by the practice of hydraulic fracturing.”

Fracking has been going on in Michigan for many years; there are thousands of fracked wells in that state. If fracking really did contaminate groundwater, even occasionally, it would surely have happened in Michigan. But investigations there found “there is no indication that hydraulic fracturing has ever caused damage to ground water or other resources in Michigan.” In fact, by 2009 when they reported that, Michigan’s Office of Geological Survey said it had never even received a single complaint or heard a single allegation that fracking had affected groundwater “in any way.”

In Oklahoma, they found evidence of groundwater contamination — from conventional oil and gas projects, that is. But from fracking? None. Despite the fact that “tens of thousands of hydraulic fracturing operations have been conducted in the state in the last 60 years,” they reported. In Tennessee: “No reports of well damage due to fracking.” In Texas: “Though hydraulic fracturing has been used for over 60 years in Texas … records do not reflect a single documented surface or groundwater contamination case associated with hydraulic fracturing.” Drillers have been fracking for oil in South Dakota since the Fifties, and for gas since 1970, and still the state reports “no documented case of water well or aquifer damage by the fracking of oil or gas wells.” Same deal with their neighbours to the west: “No documented cases of groundwater contamination from fracture stimulations in Wyoming.”

The Ground Water Protection Council, a non-profit organization whose membership consists of state-level groundwater regulators and whose very purpose is to “promote the protection and conservation of ground water resources for all beneficial uses, recognizing ground water as a critical component of the ecosystem,” issued a report in 2011 that reviewed fracking in Texas and Ohio. The study covered 16 years of activity, during which more than 16,000 horizontal hydraulic-fracking shale-gas wells were completed in Texas alone. In neither state did regulators identify “a single groundwater contamination incident resulting from site preparation, drilling, well construction, completion, hydraulic fracturing stimulation or production operations at any of these horizontal shale gas wells.”

Not only have regulatory investigations everywhere across the United States found not a single drop of drinking water contaminated by fracking, but it isn’t actually physically possible for something like that to happen. Why? Because in not one single case does a hydraulic fracture even come near the water table.

See, all of this fracturing is happening at nearly a mile, or deeper, below the Earth – that’s where the shale gas is. Water wells don’t go nearly that deep. Typically a well goes down several dozen feet, or maybe even a couple of hundred feet if the water table is exceptionally deep. America’s biggest hand-dug well, the Big Well in Greensburg, Kansas, dug in 1887, goes down 109 feet; the Well of Joseph in Cairo’s Citadel, in the Egyptian desert, goes down 280 feet. Those are deep wells, because they’re built over deep watertables. Water aquifers are often deeper: — they average around 500 feet below the ground. But fracking? That happens thousands of feet below the surface — typically between 6,000 and 10,000 feet underground.

Nowhere, anywhere, does any credible scientific evidence exist that fracking has made a single drinking water source ‘dirty’.

For the gas or the fracking fluid to get into the water table, or even an aquifer, from that kind of depth, they would have to pass upward through millions of tons of rock — like passing through a mountain. In the Barnett Shale, for instance, even the shallowest fractures are roughly a mile below the surface — thousands of feet below any aquifer or water table.

These facts have been on the record far longer than the media and activists had even heard of the term “fracking.” In 1995, the EPA under the Clinton administration — who were no slouches, either, when it came to environmental restrictions — declared that “there is no evidence that the hydraulic fracturing … has resulted in any contamination or endangerment of underground sources of drinking water (USDW).” The EPA had been studying fracking in Alabama as far back as 1989. “Moreover, given the horizontal and vertical distance between the drinking water well and the closest methane gas production wells, the possibility of contamination or endangerment of USDWs in the area is extremely remote.” That was Carol Browner writing, the environmentalist lawyer who served as EPA administrator under Bill Clinton and later became the director of the White House Office of Energy and Climate Change Policy under the Obama administration.

The New York Times recently featured a letter from Yoko Ono, representing her group Artists Against Fracking, in which she repeated the lie: “Industry documents show that 6% of the wells leak immediately and that 60% leak over time, poisoning drinking water and putting the powerful greenhouse gas methane into our atmosphere,” she wrote. “We need to develop truly clean energy, not dirty water created by fracking.”

Industry documents show no such thing. Statistics from environmental regulators show no such thing. Nowhere, anywhere, does any credible scientific evidence exist that fracking has made a single drinking water source “dirty.” On the contrary, a review of tens of thousands of wells, in state after state, and by the most rigorous federal environmental regulators, has turned up a complete blank on any fracking-related drinking-water contamination.

It is no overstatement to say that fracking has proven 100% safe for drinking water in the United States — making fracking probably one of the few resource-based industries on Earth that can actually boast such a statistic. How galling it is, then, that so much of the anti-fracking movement relies on spreading the opposite of that fact — on spreading an outright lie.

 

 

SOURCE: Levant, Ezra. "Ezra Levant: 'Not One Drop of Poisoned Water'" National Post12 May 2014: n. pag. Web. 16 May 2014. <http://fullcomment.nationalpost.com/2014/05/13/ezra-levant-not-one-drop-of-poisoned-water/>.

Changes may be coming to Kitchener's natural gas purchasing strategy

May 5, 2014

Councillors say they're keeping customers' demands for stability in mind as they propose slight changes to the way in which natural gas is purchased.

Kitchener Utilities, owned by the city, currently uses a "blended" system to purchase natural gas, buying fixed-price gas on contract for up to five years and buying market or variable-rate gas when warranted. Its rates are set once a year.

Most utilities, such as Union Gas, charge customers the market rate, and adjust prices quarterly.

A Record comparison of the two approaches showed the average customer in Kitchener paid about $1,150 more in gas supply costs over the past five years compared to Union Gas customers.

Now, councillors are proposing that the blended system be maintained, while perhaps purchasing fixed-price gas on contracts of only one or three years. Shorter fixed-price contracts would still offer stability, officials say, but would not lock the utility in for as long a period.

"It's kind of the middle of the road approach," said Coun. Kelly Galloway-Sealock.

Adopting this modified approach was approved at the committee level on Monday. Councillors John Gazzola, Scott Davey, Yvonne Fernandes and Zyg Janecki voted against the idea.

Staff are expected to report back to councillors with more information and specific policy details before the change is ratified by council.

The move comes on the heels of a recent survey which asked Kitchener Utilities customers how natural gas should be purchased.

A majority of residents said they preferred stable rates, but they weren't asked if they were willing to pay a premium for that stability.

"There needed to be a fair comparison between the two rate structures," Trysha Wharton told councillors on Monday. "I would suggest this (survey) was not done on an unbiased basis."

 

Source:

Davis, Brent. "Changes May Be Coming to Natural Gas Purchasing Strategy." Editorial. The Record. The Record, Web. 02 May 2014. <http://www.therecord.com/news-story/4489274-changes-may-be-coming-to-natural-gas-purchasing-strategy/>.