Surging Australian Gas Prices Turn Asian Consumers Towards Russia

The world's largest market for natural gas imports is East Asia, dominated by the economies of China, Japan and South Korea, all largely bereft of indigenous resources.

The trio's importance to energy-exporting economies, battered by the global recession that began in 2008, has never been higher, leaving the trio to choose amongst a number of suppliers, with China favoring pipelines crisscrossing Central Asia, lessening its exposure to maritime liquefied natural gas imports from such volatile regions as the Middle East, to Japan and South Korea, currently the world's largest LNG importer, eyeing any and all options.

Australia, previously having regarded itself as East Asia's energy back yard, is about to experience some major "blowback" on its predatory "buy cheap, sell dear" policies, with a rising competitor being – the Russian Arctic.

The Russian Federation's Novatek, which holds 80 percent of the Yamal LNG development license, is offering a 29 percent holding sale to help fund development.

The downside?

Novatek has no rights yet to export future production.

Problems with Moscow aside, Novatek is second only to the Russian Federation's Gazprom natural gas state monopoly, being Russia's second largest producer.

Obviously seeing its future in eastern Asia, Novatek via Yamal LNG has set up a 100 percent subsidiary company, Yamal Trade Pte. Ltd., to trade on Asian stock exchanges, with the company registered in Singapore.

The deal represents Kremlinology at its finest.

In late 2011 Novatek pressured the Kremlin to end Gapzrom's monopoly to export LNG, currently a Gazprom monopoly. Moving at extraordinary speed for the Russian bureaucracy, earlier this month the Presidential Commission on Energy considered the feasibility of liberalizing the country's LNG export policies, and Russian President Vladimir Putin instructed the government to study the possibility of liberalizing the nation's export of LNG, with analysts believing that a governmental decision on the issue will be hammered out by the end of next month.

While Gazprom's current monopoly on Russian natural gas exports is seen as a major barrier to the Novatek's sale, the fact that it is being considered at all represents an extraordinary policy shift in the Kremlin's thinking towards dealing with companies that can move quickly to nail down Russia's market advantage in Asia, as Asian options face rising costs, with Novatek chief financial officer Mark Gyetvay citing the rising costs of Australian projects being pursued by Royal Dutch Shell, Chevron and others making Russia's Yamal arctic option more alluring. Earlier this week Gyetvay said, "From our experience with the Australian side we are seeing more interest from Asia-Pacific buyers to look at our project, where a year ago their primary focus would have been closer to home. We are talking to companies now in the Asia-Pacific region largely because they see that there's a huge amount of risk from all these Australian projects … that either may not come on stream, or they can get a better deal by coming into a more cost-effective, conventional onshore type development."

A not insignificant threat to Australian energy expansion plans, as the country currently has nearly $190 billion of LNG export projects under construction that would add more than 80 million tons per annum of LNG production by 2020, an increase that would make the country the world's top LNG exporter.

The downside Down Under?

Late last year, three of the seven Australian LNG projects in early stages of construction announced cost hikes averaging more than 20 percent, primarily caused by rising labor costs and the strong Australian dollar.

Gyetvay sees advantage in the chaos, telling reporters, "There've been discussions over the last week with the Russian government about liberalizing the LNG markets, and we'll wait for them to come back to us, supposedly by the end of March."

Place your bets – kangaroo vs. the bear in the land of the rising sun.