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Zhang Chengwei, president of PetroChina Jiangsu LNG Co. Ltd., poses for a picture with B.C. Premier Christy Clark at an LNG facility near Rudong, China.Nathan VanderKlippe/The Globe and Mail

China's massive natural gas supply deal with Russia isn't a death knell for Canada's nascent liquefied-natural-gas (LNG) industry. But it may well narrow the field of West Coast LNG projects that will ever see the light of day.

The 30-year deal will see Russia ship 38 billion cubic metres (or about 1.3 trillion cubic feet) of natural gas a year to China by pipeline, beginning as soon as 2018. That's 50 per cent more than China's total LNG imports last year – and China is the world's third-biggest LNG market.

For the 14 groups looking at building LNG facilities on the British Columbia coast, with an eye on lucrative exports to Asia (and China typically being at the top of their list), it's an obvious blow. Russia's supplies are much closer to the Chinese market, they don't have to be converted from gas to liquid and back again, and they don't need to be transported by ship across a very large ocean. Both in terms of cost and time, Russian shipments offer a huge advantage.

Still, looking at the bigger picture, the Russian deal isn't going to solve China's natural gas supply issues. There will still plenty of room for LNG, from Canada and elsewhere.

The U.S. Energy Information Administration forecasts that China's natural gas needs will triple over the next 25 years, to about 17 trillion cubic feet annually, as its economy continues to expand and it weans itself off its heavy reliance on coal. Its domestic gas production is expected to be about 10 trillion cubic feet a year by that time – leaving an immense seven-trillion-cubic-foot annual supply need. The gap alone is more gas than China consumes right now – and the Russian agreement would fill barely one-fifth of it. Even by 2020, China probably faces a supply gap of about three trillion cubic feet, and the Russian supplies would fill less than half of it.

And China is hardly the only potential market for Canada's West Coast LNG. Japan is by far the world's biggest consumer of LNG, and its demand is growing fast as the country moves away from nuclear. South Korea imports about twice as much LNG as China. India is another market with massive potential.

But the bigger issue may not be market access or demand for Canadian LNG, but prices.

An influx of gas from Russia will certainly drive down Asian prices for LNG and natural gas in general, which have been sky-high due to the region's relative lack of access to supplies – a big reason why LNG production has looked like such an attractive proposition in the first place. The price formula China and Russia have agreed to looks to be about 30 to 40 per cent cheaper than the going rate for LNG.

There were already doubts about how many of the 14 LNG projects proposed for the B.C. coast could truly be economic to proceed; Russia's big new supply to the region, at a big cost advantage, could well drive prices too low for many of the smaller, higher-cost projects to make sense.

Of course, the rush of new LNG capacity being developed for the Asian market by many countries was expected to greatly increase supplies and thus drive down prices – which, combined with rising costs of building LNG plants, was already going to make many of the proposed Canadian projects non-starters. Experts think Canada will be lucky to get more than four plants developed on the B.C. coast. The China-Russia deal may, effectively, thin the field of serious contenders.

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