What the Russia/China Deal Could Mean for BC's Vaunted LNG Economy

Implications for BC of the Russia/China Gas Deal

by Peter Ewart  - 250 News

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.

Putin's China Handshake - image: RT

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 spiraling 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 .