Implications for BC of the Russia China gas deal
By Peter Ewart
On the surface, it’s just another trade agreement between two foreign countries. But this one is more than that. Much more. And it has serious implications for British Columbia.
Russia and China have just signed a deal for Russia to supply 1 trillion cubic metres of natural gas to China over a 30 year period. The deal is estimated to be worth $400 billion and, according to Alexei Miller, CEO of Gazprom, is the biggest contract in the history of the country (BBC News, May 21). Russia has the largest reserves of natural gas in the world, with Iran being second.
In addition to this mammoth sale, the two countries have pledged to establish “a comprehensive energy cooperation partnership,” which hints of more such deals to come. Indeed, as one analyst put it, “the opening of economic doors with China could well be the greater achievement.”
This new partnership between Russia and China owes as much to politics as it does economics. Since Richard Nixon, one of the main planks of American foreign policy was to keep Russia and China divided. But in recent years, especially under Bush and Obama, U.S. foreign policy has resulted in the opposite, i.e. pushing Russia and China together in a new Eurasian economic and political alliance. This alliance, which is still in the process of coming into being, includes other major gas and oil producers, such as Iran, Khazakhstan and Uzbekistan, and will likely attract other countries in the future as world power structures change and reconfigure (the BRICS formation of countries being another such example).
What are some of the implications for British Columbia? For one thing, Russia will likely play a much bigger role in supplying natural gas to not only China, but also other gas-importing countries in Asia such as India, South Korea and Japan, i.e. BC LNG producers will encounter even stiffer competition for Asian markets.
For another thing, the Russians are selling their gas at a price much lower price than “spot cargoes” in the Pacific. While their price is still higher than gas sold in North America, this will exert a downward pressure on the eventual BC price for LNG shipped to Asia (Nathan Vanderclippe, Globe & Mail, May 21). All of this weakens the BC government’s hand when it comes to negotiating taxes and royalties with LNG investors who are well aware of this developing international situation.
On the positive side, BC may be able to secure a fraction of the Chinese market as China hedges its bets in case of political instability in Russia or Iran. But it may only be a small fraction (Jeremy Nuttall, 24 Hours Vancouver, May 20).
And, of course, there are the other LNG producing countries outside of the Middle East, Russia and Central Asia, such as the U.S. and Australia that are already ahead of BC in terms of export deals and the building of LNG infrastructure.
That being said, the international natural gas market is notoriously volatile. When countries (or provinces) hook their economies to it, they slide onto the saddle of a bucking bronco.
But there is something else that promises to be even more volatile in coming years, and it, too, is related to the Russia / China gas pact. And that is the currency arrangement attached to the deal. Payment for the Russian gas will be made in Chinese Yuan. This is a highly symbolic move and represents another blow to the status of the U.S. dollar as the world reserve currency. For much of the 20th Century, international oil and gas trading was settled in U.S. dollars, i.e. the petrodollar. This world reserve status has given the U.S. a huge advantage in the world economy. But more than a few countries feel that this privileged status has been abused, that the U.S. has been printing dollars recklessly to paper over its spiralling debt and other economic problems.
A not uncommon view is that the U.S. dollar should be replaced with a basket of currencies (including gold) or, down the road, a single currency such as the Chinese Yuan. In either case, the U.S. dollar would be severely weakened (which also, by the way, would pose serious problems for China as a major holder of U.S. Treasury bills). This complicated situation could play out in a number of ways (including currency wars) that are difficult to predict, but one possibility might mean a higher Canadian dollar which, of course, would have a significant effect on BC’s exports, including natural gas.
Strongly backed by natural gas interests, the BC provincial government, especially during and since the last election, has had a single minded focus on LNG and its much heralded promise to create tens of thousands of jobs and billions of dollars of revenue. Yes, no doubt there is possibility in the LNG sector, but also, as recent international developments reveal, extreme volatility and uncertainty. This uncertainty exists within the province itself, with various First Nations and communities opposed to LNG development across their territories.
The question arises – should we tie our fortunes so tightly to this bucking bronco? Or should we have a broader and more balanced view that includes our traditional renewable industries, such as forestry, agriculture, and fishing, as well as other industries?
What will it be? One wild horse or a team of horses?
Peter Ewart is a columnist and writer based in Prince George, British Columbia. He can be reached at: peter.ewart@shaw.ca .
Comments
There is a multitude of issues here apart from the cowboy economics options.
We need to consider that $400 billion over 30-years is only 75% of what Russia currently sells to Ukraine alone. The Ukraine is rump state vastly different in potential than China. The infrastructure needed for this commerce is yet to break ground, so it is still a dream at this point in time… from pipelines to the gas fields in Siberia that will fill those pipelines. Over $75 billion in infrastructure ($55 billion by Russia and $22 Billion by China for pipelines on the Chinese side of the border) all just an understanding at this point. The Chinese Partner in this deal is the same one that owns Northern Gateway (Petro China) and similar in revenue scope.
So unlike Canada Russia will still have full control of the resource to their border. Russian Prime Minister Dimitry Medvedev said this of the deal:
—–
âOne side always wants to sell for a higher price, while the other wants to buy for a lower price,â Medvedev said. âI believe that in the long run, the price will be fair and totally comparable to the price of European supplies.â
—–
So they haven’t yet determined the price which goes to show this is merely a political signing and not an actual economic agreement. The price in Europe is likely to be the price any project in BC gets approved on, and not the Asian price… most of our market may very well end up being to Europe.
At the end of the day though we should be concerned more about the union of Russia and China from their shared plans to use their own currency and their recently announced economic agreements that are designed to build an economic sphere independent of the west. The Great Wall Car Company of China announced yesterday as well they will be building a new car plant in Russia. The Chinese and Russian governments also announced they would like to build their own airliner in Russia that competes with Boeing and Bombardier at a time when Bombardier is building plane factories in Russia transferring technology in the process. Technology Canadian tax payers paid for.
Ultimately if they do make a marriage of convenience and decide to pull the rug out from the US Federal Reserve, then they very well could cause massive economic damage to the west with rising interest rates and a bubble collapse of the monetary ponzi scheme policies shielding the west from free market realities. If we have all our eggs in China and debt based currency manipulations, we could very well become economic collateral damage to the Russian Chinese partnership.
The Russians understand the importance of protecting their national industries, as do the Chinese… both are working towards nationally sustainable economies, and so should we. If the need is there, and the price is right, than I am sure LNG in BC will become a reality… but in the mean time I think the policy is more about resolving a national trade imbalance from bad foreign trade policy than it is about prosperity for BC.
So much more effort could be going into producing domestic value with our natural resources that is currently forgone in the name of off shore subsidized productivity for the sole benefit of the investing class… whether it be raw logs in forestry, refineries in oil and gas, or processing in mining… BC does very little to diversify the industry and create sustainable added value.
I think the biggest mistake we make as a nation is to allow domestic energy to be sold at world market prices. In BC we should have an energy advantage that off sets the human slavery arbitrage, and environmental subsidies of locating production off shore (rather than a carbon tax liability)… and the most that can be done for our economy is on the import side pursuing fair trade rather than free trade (of which will never happen under Harper or most corporate paid politicians today).
If Petro China is in a deal like this with China and also is owner of Northern Gateway and large swaths of the oil sands, possibly some LNG investements… then how would Harper deal with them as part of Russian sanctions, should say for example under the hypothetical scenario where Russia annexes Eastern Ukraine because of civil war?
Especially if Petro China is a state owned enterprise profiting by trading with a potential enemy (Russia), and we were at war with them? I guess this is where Harper’s ‘enlightened sovereignty’ policy comes in? Meaning globalization exempts some from the realities of nationhood and national interests (ie state owned enterprise operating in Canada?).
Not only the above various areas of Europe have vast shale gas reserves. Though countries like France and Germany have banned fracking it is evolving into using non toxic chemicals and propane so these bans could be lifted at some point.
What we are witnessing with LNG, is a natural resource becoming a global commodity.
Just like oil has been for decades.
Which will mean world market prices ,some
time down the road.
It would be great to see if the government
would put this much effort into replanting
the forest that was wiped out by the beetle kill.
Since forestry is the only renewable resource.
There is also a Tacoma plant that will make methanol out of natural gas to be shipped to Asia to make plastic. A seemingly more creative venture than the LNG proposals in bc.
http://seattletimes.com/html/businesstechnology/2023508222_tacomalngplantxml.html
“… then how would Harper deal with them as part of Russian sanctions…”
It is a problem for him or any other sanction happy government to figure out!
The imposition of sanctions is a sign of failure, of a lack of wise and astute politics if that is the only option left to the country which imposes them!
Problems in other countries are for those other countries to sort out and solve! There are many lessons to be learned from history where it would have been a lot better to stand aside and let those who were facing controversies would have had a better solution and superior outcome if everybody would have just left them alone.
lildiger, Kitimat already has a methanol plant. Methanex I think was their name. Based in Vancouver they are the worlds largest supplier of methanol for use in plastics.
I use to own their stock and made a really good return on it back about ten or more years ago.
The Kitimat location of Methanex is no longer operational.
Shell bought that location ,and that is where it wants to locate it’s LNG Plant
A great opinion article, much of which I agree with. Like any good investment portfolio, we really should be developing a variety of our natural resources and diversifying our province’s revenue sources. As John Horgan mentioned in yesterdayâs news article.
By the way, I would like to acknowledge ammonra for bringing the Russia – China LNG agreement to our attention yesterday, and the possible implications that agreement could have on the future of our natural gas industry in BC.
Seems all these trips to China, made by; Harper, Christy, and Shari did not bare as much economic fruits as they could have? Of course, Russia and China are neighbors with a common socialist / communist pastâ¦how can we compete with that?
If our goal is to sell to China more than we buy from China, how do we really benefit?
International trade should be just that ~ trade. An exchange of each country’s alternate relative surpluses, for the benefit of both in allowing a greater diversification of consumption in each country. it is essentially ‘barter’. That’s the ONLY way it makes any sense at all.
If we persist in the notion that running a so-called ‘favourable’ trade balance, where we actually part with MORE of this country’s real wealth than what we receive back in alternate real wealth from abroad, and get international ‘credits for the difference, we are physically getting POORER, not richer.
Those ‘credits’ only have any real value as effective demand for goods from abroad. In the case of China, so far, goods from China. (Since the Chinese yuan is not (yet) the world’s reserve currency.)
But we have no intention of using them that way. Instead they’ll be used to cover up a growing systemic flaw in our own financial system. One that prevents us from currently paying fully ‘for’ what we do ‘from’ what we do. And we’ll pay a horrible price as a nation for doing this, rather than moving to correct that flaw while we still can.
Comments for this article are closed.