Russia-China Natural Gas Deal to Set LNG Price Floor, BofA Says

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.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE