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Prospects for Development of LNG in Russia
Key topics of Konstantin Simonov's speech at LNG 2008. The Future for LNG: Where is the Industry Going.
London, April 23, 2008.
Difficulties of Developing LNG Projects in Russia
LNG as a new opportunity for Russia
Development of LNG production and export will allow:
Aims of Gazprom
Strategic goals of Gazprom in the LNG production and supplies sphere are:
Gazprom executives claim that the company has been implementing a phased strategy aimed at boosting Gazpom’s share of the LNG market since 2004, counting from the start of speculative (and later spot) operations with outsourced liquefied gas by Gazprom’s lower-tier subsidiary Gazprom Marketing & Trading
For the four years Gazprom made one off transactions and swap operations (LNG – pipeline gas) with BP and Gaz de France and supplied LNG to the USA, Great Britain, South Korea and Japan. In all, Gazprom sold around 1 bcm of LNG
The goal of these projects that were on the edge of profitability was to gain experience of real trade in this unique market and run the full chain (apart from LNG production) from transportation to regasification.
* A medium-term contract was signed with BP for 2006-2007, including sale of rights for several tanker shipments from Trinidad & Tobago to the USA.
LNG in Gazprom Strategy
Gazprom believes that Russian LNG will open the following opportunities:
Lawmaking in the LNG Segment
Economic Development and Trade Ministry and Gazprom proposed and the government passed lifting of LNG export customs duty.
While pipeline exports are subject to 30% tax of the gas price for the customer, lifting of customs duty for LNG makes LNG projects very attractive and reduces financial burden on their owners (which looks like a great deal considering high capital intensiveness of LNG projects).
The second decision resulted in a Gas Export Federal Law enacted in summer 2006. The law says that the owner of the unified gas transmission system (Gazprom, that is) has the monopoly on exports of natural gas, including in liquefied state. Only projects regulated by PSAs do not fall under the law (only Sakhalin-2 in the LNG case).
LNG export projects not affiliated with Gazprom were officially banned, whereas 2-3 years prior to that such projects were actively discussed(for example, LNG plant based on South-Tambei deposit).
In new version of Subsoil Law there is the new term: «federal field».
Federal is the field with mineable resource:
All shelf fields also have federal status.
Shelf will be the Property of Gazprom and Rosneft
If you want to be the nominee of shelf fields you must satisfy the following requirements:
But State Companies will need foreign Partners
The project’s design was to produce around 15 bcm of gas per year at the Lunskoye deposit, lay down gas pipeline across the island, from the north to the south, and build a LNG plant (with a capacity of 9.6 million tons a year) and a LNG export terminal.
By the time Gazprom was brought in, 98% (9.4 million tons) of gas was contracted under long-term agreements (15+ years) with the consumers in the USA, Japan (two thirds of all gas contracted) and South Korea.
After Gazprom’s arrival new possibilities may open before the project – another LNG plant with the capacity of 4.8 million tons. S2facilities may be expanded in order to receive gas from the Sakhalin-1 project (6-7 bcm a year that are currently non-demanded in the domestic market and may become resource base for the second plant).
In February 2008 Gazprom executive board that had previously put off a decision on the project that was named Baltic LNG announced that it was found economically inadvisable.
But it doesn’t mean the decline of Gazprom’s interest to LNG business – Baltic project from the very outset was problematic -e.g. the was no reliable recourse base.
Shtokman project has the following advantages:
Shtokman as the new model of cooperation with foreign companies in shelf projects
In 2006 Gazprom told that there will be no partners in Shtokman.
But in 2007 the blocking stake of the Shtokman’s first phase was won by Total, 24% more went to Norway’s StatoilHydro.
Project’s owners are expected to approve investment program by mid2009.
The question whether foreign owners will get Shtokman reserves on their balance (in proportion to their stakes) remains uncertain. After the announcement of the transition of 25% to Total, the French side said it planned to put the reserves on its balance sheet. However, the managers of the Norwegian company questioned such possibility in public.
Taking into account annual output and 25 years life of the project, the share of Gazprom’s partners is 140 bcm of gas for each partner. But they will not have a right to export this gas. The partnership company that Gazprom, Total and StatoilHydro will establish will be selling the entire gas (both meant for pipelines and LNG) to Gazprom under a special formula that will depend on export climate. Gazprom Export will be in charge of marketing policy.
Russia has vast gas reserves on the continental shelf, which is logical to use to develop LNG projects.
Massive development of the oil and gas potential of the Russian northern seas is distant because of the lack of own technologies.
Governmental regulation of access to subsoil made it impossible for private companies to organize partnerships and develop independent LNG projects. Gazprom’s monopoly on LNG exports and plans to give the company offshore licenses without tenders mean that the state company will be dominating in every promising LNG project.
Even by 2015-2020 probability of successful launch of such projects depends on Gazprom’s partnership with foreign partners. Basic pattern of partnership will probably be the model used over Shtokman. However, its effectiveness is yet to be confirmed in the course of feasibility study and consultations of foreign participants in the project with the US SEC on the possibility to put first phase reserves on the balance sheets of Total and StatoilHydro in proportion to their stakes in the operator company (that does not formally own any reserves).
The main target market for new Russian LNG (except for the already divided Sakhalin’s gas) is the rapidly developing North American market. Supplies to remote parts of Europe do not seem economically sound in the current conditions. But in the future this may change if LNG pricing principles change or price arbitrage is used (exchange of supply rights with producers in the Middle East)
Shale Revolution: Myths and Realities
The boom in shale gas production in the US and its wide-ranging influence on markets rocked the gas world. Liquefied gas deliveries were redirected, altering the already fragile balance of demand and supply in traditional markets for pipeline gas in Europe.
Liquefied Natural Gas Outlook: Expectations and Reality
Russian oil and gas sector under sanctions: main threats to the sector
Political confrontation between Russia and the West is increasing. There are speculations about economic war. No wonder the Russian oil and gas sector is the main target of Western sanctions. Direct taxes on the oil and gas sector account for half of Russia’s consolidated budget. There should be no illusions – sanctions will not be lifted in the near future but, on the contrary, they will be expanded.
State regulation of the oil and gas sector in 2014, prospects for 2015
Our traditional series of reports is concluded with the final review of main developments in the Russian oil and gas sector in 2014. It has not been a typical year for the sector. The oil and gas sector encountered several serious problems simultaneously. World oil prices dropped sharply. Russia was subjected to tough pressure of western sanctions that naturally mostly affected the oil and gas sector – the flagship of the Russian economy. Besides, the general worsening of the budget situation made the government again resort to its favorite practice of increase in taxes on the FES. So, what is the standing of the sector in this situation?
Gazprom: breakout strategy
Gazprom is under double pressure. It is becoming more and more difficult for the company to maintain a dialogue with the EU that perceives the gas giant as instrument of political pressure by Russia. Ukraine is again on the agenda both as a capricious consumer and a shrewish transit state. Large independent gas producers continue attacking Gazprom on the domestic market; they are suffering from sanctions and count on expansion of their share on the Russian gas market as compensation.
State companies vs. private firms: two projects for the sector
The attack on Bashneft again puts the issue of the main direction of the oil sector development on the agenda. Although Rosneft strongly refutes its involvement in the Bashneft case, there are concerns about formation of the “oil industry ministry”. However, Russian elites should not be perceived as overall adherents of nationalization. In reality, nationalization is not a goal but an instrument. It is used to take away assets from competitors.
Central Asia and Caspian Sea region: struggle continues
Studying changes in Central Asia and the Caspian Sea region has long been a priority for the NESF. The interest in this region is not declining. On the contrary, for the EU this is one of the few options of acquiring new suppliers of natural gas to European markets. However, the situation is not simple for the Europeans.
Managing oil and gas sector: decision-making
Randomness of Russian energy policies leaves many questions about who the decision-maker is in the Russian oil and gas industry unanswered. The sector is facing serious challenges. But are state mechanisms adjusted to solve them?
Dragon hunting: Russia fighting its way to oriental markets
The West’s distrust in Russia intensified further in 2014 thanks to the well-known political reasons. Pushing Russia from the European market is becoming an obsession of Brussels that is pursuing this policy quite aggressively. Although there are no really practical results, this cannot but irritates Russia that is thinking more and more often about Asian consumers. Moreover, this part of the world is forecasted to have confident rise in the demand for oil and natural gas.
Different approaches towards Russian oil industry: search for strategic development vector
The latest official forecasts of the oil sector development have rather gloomy outlooks. It is necessary to find a substitute for production at traditional Western Siberian deposits in the medium-term perspective. Otherwise the sector and the Russian budget in general will face problems. Russia has to choose between three options: offshore deposits in the Arctic, Eastern Siberia and non-conventional oil in Western Siberia.
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