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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
Middle East: an earthquake on the world market of hydrocarbons
Developments in the Middle East attract great attention. Many experts believe this region plays a major role in formation of oil prices and the future of the world market of hydrocarbons. The situation in the region is indeed developing very quickly. A conflict between Saudi Arabia and Iran has put an end to plans of creating OPEC-2. Saudi Arabia is changing its strategy, while Iran is increasing its presence on the world oil market; the latter also intends to become a serious natural gas exporter being ready to join the South Corridor project and intriguing against Russia. Meanwhile, the war in Syria may intensify at any moment affecting Iran’s production potential and Turkey’s transit possibilities. These events directly influence the supply of hydrocarbons on the market. It means all oil producers are concerned about them, at least because they need to understand the level of oil prices in the future.
Life under sanctions or is there light at the end of the import substitution tunnel
The sector has been under sanctions imposed by the USA, Canada and the EU for almost two years. They restrict access to credit resources and technologies, create problems with marketing and change the psychology of operation of Western companies in Russia making the latter more cautious and careful. Has Russia found a response to this challenge; has it benefited in some way, e.g. accelerated import substitution that Russian officials are so fond of taking about? Answers to these and other questions are found in a new report by the National Energy Security Foundation.
Forgotten shale: development of unconventional natural gas production, potential of North American gas exports
Experts turned their attention to shale oil long ago. The shale gas revolution in the USA is not on the forefront of the agenda. However, this issue remains quite intriguing, given that LNG supplies from the USA will begin soon. Gas deliveries from North America are the result of employment of shale production technologies. This is why it is important right now to understand what is going on in the shale gas industry in the USA and whether North American gas exports threaten positions of the Russian gas in the EU and Asia. Moreover, it is necessary to see if the shale gas revolution can be exported to other parts of the world.
State regulation of the oil and gas sector in 2015, prospects for 2016
The traditional series of NESF reports is concluded with the final analysis of main events in the Russian oil and gas sector in 2015. This year has been very complicated for the sector. Oil prices kept falling, which affected the sector negatively and made the government again raise taxes on FES players.
Gazprom: the life in the epoch of sanctions, the turn towards the East, growing domestic competition
Gazprom has found itself under double pressure. On one side, it is becoming more complicated for Gazprom to deal with the EU that strongly perceives the Russian company as an instrument of political pressure by Russia. On the other side, the gas giant is attacked on the domestic market by large independent gas producers that are suffering from sanctions and count on expansion of their share on the domestic market as compensation. Besides, the period of low prices of hydrocarbons continues on the world market.
The shale oil revolution in the USA, its influence on the industry
The shale revolution in the USA is the most topical issue in the world oil market. The balance of demand and supply and, correspondingly, oil prices and other things depend on it. The shale gas revolution some time ago stirred the world energy market and led to serious changes in the gas market. Natural gas forecasts had to be seriously revised predicting the emergence of the USA as a major natural gas importer. This time we have to analyze consequences of the second shale revolution – an oil one.
Natural gas motor fuel: will the balance on the domestic market really change?
At the moment there are good prospects for development of the natural gas motor fuel in Russia. Difficulties with expansion of gas exports raise the question about promotion of gas consumption on the domestic market, particularly given that oil companies promise to increase their natural gas output. If the domestic demand for natural gas is not elevated, the oversupply of natural gas may become an unexpected and serious problem.
Tax maneuver: fiscal policy in the oil and gas sector, prospects of changes
Taxation is one of the key problems in the sector. Oil companies have long been struggling for changes in the fiscal philosophy. They suggest that the “Kudrin scissors” that took away incomes of oil companies by taxing their revenues should be replaced with taxation of profits. And it is indeed a big difference. The sector long ago turned into the main supplier of the money to the state budget; however, the outstanding question is about prospects of the sector. Oil production has reached its peak and its possible decline is becoming more and more plausible, unfortunately. And it will lead to serious problems in the budget sphere.
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