
China’s natural gas demand grew by 7.1 percent year on year in the first 10 months of 2014 and the country currently faces a 45 percent supply deficit relative to demand. Complicating matters, China’s shale gas sector is struggling to achieve desired production targets. Sinopec data show that China produced 6.8 billion cubic feet (BCF) of shale gas in 2013 and with approximately 400 wells now drilled, could produce between 35 and 53 BCF of shale gas in 2014. Yet this is only enough to fuel two to three 500 MW gas-fired power plants for a year – a drop in the bucket in a massive energy economy like China’s.

So if shale and other domestic production can’t close China’s gas supply gap, what can? The short answer is more pipeline gas from Central Asia, especially Turkmenistan, seaborne LNG, and additional pipeline gas from Myanmar, and eventually, Russia.

Russia’s competitive position in the Chinese gas market is significantly weaker than the states of Central Asia, and much of this weakness is self-inflicted. Russia’s recent decision to cancel the South Stream gas pipeline, its continuing support for “separatists” in Ukraine and hostile behavior towards many European countries, stagnating European energy demand, and an impending US LNG export push are putting Russia further into a weak position for negotiating with China over gas import terms. A decade ago, Gazprom used the prospect of building pipelines to China to bully its European customers but never actually seriously pursued a gas deal with China National Petroleum Corporation (CNPC). Unfortunately for Gazprom, it now increasingly needs Chinese gas customers but while it dallied for the past 10 years, Turkmenistan, Uzbekistan, and Kazakhstan moved aggressively to grab gas market share in China as the country’s hunger for imports rose.

China’s gas market first turned to a deficit in 2007 and this deficit rapidly expanded each year from 2009 onwards, right as Central Asian gas supplies to China began ramping up. China’s gas buyers channeled their inner Toby Keith, wanted “a little less talk and a lot more action,” and Turkmenistan delivered.

China’s proactive engagement with Central Asian gas producers deals a double blow to Gazprom. First, Turkmen, Uzbek, and Kazakh gas feed a market that was ripe for Gazprom’s taking if it had moved decisively. Second, now that Central Asia has multiple gas export options, Gazprom has lost a source of captive gas that it could buy cheaply and then sell for a handsome markup in Ukraine and other parts of Europe.