The Great Debate

from Breakingviews:

Russia puts gas-hungry China in a bear hug

By Ethan Bilby
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Russia has signed a long-awaited gas pipeline deal with China, and it leaves the People’s Republic in a bear hug. Russia gets a new market outside the increasingly frosty European Union. Oil major PetroChina gets to balance out some losses from low regulated prices at home. But the optics of the deal shred Beijing’s pretensions to political neutrality.

Russia could use a friend. EU countries have been planning to diversify supply away from dependence on Russia, which provides a third of their energy needs – especially after a dispute in 2009 saw gas cut off. Annexing Ukraine’s southern Crimea region has raised the temperature further. New pipelines from places like Azerbaijan are designed to limit Moscow’s leverage.

China presents Russia with a more willing customer. Its ravenous energy needs provide stable demand, which previously looked like it would have to be met by more inconvenient sources, like Australian and U.S. liquefied natural gas. Under the new deal, Russian state energy group Gazprom will supply Chinese counterpart PetroChina with up to 38 billion cubic metres a year, around 12 percent of China’s target demand in 2018 according to Alliance Bernstein.

The timing looks good for PetroChina, which handles all pipeline imports of natural gas into China. Below-market tariffs set by Chinese regulators leave it in the red. PetroChina’s average selling price of gas is $6.30 per thousand cubic feet according to CLSA analysts. Yet imported Central Asian supplies cost around $10 per thousand cubic feet, with LNG around $15. That drove PetroChina to make a loss of around 42 billion yuan ($6.7 billion) importing gas last year. Every bit of costly LNG this deal replaces will help.

Sustainable oil price is $70-90: ESAI

(ESAI, Energy Security Analysis Inc, is a Massachusetts-based energy consultancy. The opinions expressed here are those of ESAI.)

The crisis is over, economies all over the world are recovering, record unemployment is slowly subsiding, and oil demand is growing. The logical question now is where will oil prices go from here? The question is not what the price of oil should be, as discussed at last month’s International Energy Forum. Likewise, it is not what is the equilibrium price.

Equilibrium price is a concept, offered by classical economists, which asserts that there is a price at which supply and demand balance. Price behavior, especially in recent years, has proven that this is an overly simplistic and unworkable concept for the oil market. There is never a point in the global oil market when supply equals demand, and thus there is no such thing as an equilibrium price. The right question is what is the fundamentally sustainable price?