3 Reasons Putin’s Nat Gas Deal Is A Big Deal

It’s not just because it took 10 years to negotiate with China or is worth $400 billion, but the new deal Gazprom signed to supply 38 billion cubic meters (bcm), which is about the amount NY state uses annually, of natural gas to China each year for the next 30 years may be a major game changer for 3 big reasons.

The first big reason is that this deal may reduce air pollution in China.  That may not only clean the air for breathing but may reduce the erratic weather causing global warming that is spiking agriculture prices  and now possibly food prices.  Since the deal implicitly prices the natural gas China is receiving from Russia at a 25% to 40% discount to the cost of importing liquefied natural gas from overseas, this may not only cause China to use this gas over the rest of the world’s but it may motivate China to more actively replace oil and coal with natural gas as main energy sources. Given natural gas is cleaner, this in turn may reduce pollution. 

The second reason this deal is a big deal is that it may be the catalyst to building natural gas from a local commodity to a global commodity.  If natural gas becomes more standardized and tradable as a global commodity, it may not only reduce pollution by motivating the switch from oil and coal, but it may include specifications within the contracts to set forth guidelines to control pollution. Currently natural gas is the only commodity in the S&P GSCI where the World Production Quantity is determined based on regional (North American) production.  The globalization largely depends on the logistics and technology in order to transport the gas. For example, in 2013 there was news of a U.K. company signing a deal to bring U.S. natural gas to U.K. homes, which may help the U.S. natural gas globalization, but the trick is having the infrastructure in place to execute the trade.  

Last, this deal may open investment opportunities across the energy spectrum. The construction of the pipeline may initially create some direct investment opportunities but as the pipelines start working, it may possibly further open futures markets, at least regionally if not globally, to encourage more production that may grow the entire market.



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