The recent $400 billion energy deal between Russia and China, the largest of its kind, is set to reshape the global energy markets and geopolitics.
Under the deal, state-controlled Russian energy giant Gazprom will supply China with liquefied natural gas (LNG) for at least 30 years starting in 2018. It seems a natural fit. China is the world’s largest consumer of energy, while Russia, which holds 45 percent of the of the world’s known gas reserves, is the world’s largest exporter.
For China, the deal is a huge win for at least three reasons. First, China would prefer to have gas supplied by relatively stable land routes out of Siberia instead of across oceans policed by the U.S. Navy. Second, China has been eager to diversify its energy sources, especially in terms of geography. Thirdly, in a region where natural gas is very expensive (“the Asian premium”), China appears to be getting a bargain on price.
The deal is equally important for Russia. Russia now knows it must reduce its energy dependency on Europe. Europe has been the primary consumer of Russian gas, but Russia hopes to send one-third of its gas exports to the east by 2035. Moreover, with a new market in the east, the deal strengthens its hand in Eastern Europe.
With its own version of the Asia Pivot, Russia has been looking beyond China toward important U.S. allies. Japan, whose utilities pay the world’s highest prices, would benefit enormously from cheaper Russian gas. Ten percent of Japan’s LNG imports already come from Russia.
India is also very interested in the construction of a gas pipeline from Russia to help reduce its dependency on expensive gas imports from Qatar. South Korea and Taiwan are equally interested in Russian gas.
The Sino–Russian energy deal is one more reason policymakers need to remove barriers to exporting natural gas (and crude oil). While the U.S. is now the world’s largest producer of natural gas, Russia is the world’s top exporter. The U.S. exports about as much natural gas as does tiny Slovakia.
LNG exports would bring in billions in profits for American companies, result in more production, and create thousands of high-paying jobs. Equally important, they would blunt geopolitical advantages currently accruing to Russia. Europe would no longer be held hostage to Russian gas, and much of Asia, given the choice, would prefer relatively cheap American LNG.
U.S. companies, however, have been slow in building LNG export capacity because of regulatory barriers. One such example is that U.S. law requires export facilities get a “public interest” approval from the Department of Energy if the buyers are from countries that have not signed free trade agreements (FTAs) with the U.S. Non-FTA countries include all of Europe, China, India, and Japan. This is an unnecessary step in the process that Congress should remove.
Building U.S. LNG export capacity will take years. The U.S. needs to start now. The Russians are wasting no time.
